Many people have credit cards, and with every credit card, there is a credit limit. Although everyone may know that they have credit limits on their credit cards, they do not always understand what this means. We will take the time to clear up this mystery so that every consumer knows the meaning of the credit limit from now on.
What Is a Credit Limit?
The credit limit is the maximum amount of money that credit card issuers allow their clients to charge on their credit cards. For example, if a consumer is approved for a credit card with a $2,000 credit limit, this consumer will be free to make purchases with this card in the amount of $2,000.
What Is the Average Credit Card Limit?
According to the experts at SoFi, the average credit card limit was $30,365 in 2020. Because each consumer has a different credit history, the credit limits for everyone can be wildly different. In fact, some people may even have credit limits as low as $300.
How Do Credit Card Issuers Determine Consumer Credit Limits?
Each consumer’s credit limit will be determined by the following:
- The current economic conditions in the country.
- The goals and policies of the credit card issuer.
- The consumer’s history with the card issuer.
- The consumer’s debt-to-income ratio.
- The consumer’s income.
- The consumer’s credit scores.
A consumer with very high credit scores may receive the highest credit limit. If the consumer has several other credit cards, this may deter the card issuer from offering a high credit limit. Credit card limits can also be impacted by factors that are outside of the consumers’ control. For example, at the beginning of the pandemic, the average credit card limit went down by 3%. If consumers were able to keep up with their bills during the pandemic, their credit limits would have the opportunity to rise in these two years.
What Is a Predetermined Credit Limit?
A starter credit card is an example of one that may offer a predetermined credit limit. For example, a typical credit limit for a starter credit card is $500, but a premium credit card may have a predetermined credit limit that is equal to $5,000.
What Occurs When Consumers Try to Spend Over Their Credit Card Limits?
It isn’t a good idea to try. When consumers do spend over their credit limits, these transactions are usually declined. Spending over a credit limit isn’t good for a consumer for more reasons than one. Besides having the transaction decline, the consumer’s credit utilization ratio increases, and this damages their credit scores.
What Should You Do Instead?
It is a better plan for consumers to increase their credit limits. This allows them to purchase additional goods, and as they increase their available credit, they will also lower their credit utilization ratios, and this increases their credit scores.
Consumers may ask their credit card issuers to increase their limits at any time. This works most of the time, but if it doesn’t, consumers will have to take some time to increase their credit scores organically.