How Is Your Credit Limit Determined?

Your credit limit is the maximum amount that you can spend with your credit card. To determine the amount, credit card companies look at a variety of factors to gauge your ability to handle credit.

They consider your income and how long you've been employed. They review your credit report in detail and, of course, look at your credit score. They all have their own criteria, and they might even weigh the same factors differently.

Let's take a look at some of the most common areas that credit card issuers review when they decide what your credit limit should be.

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Company guidelines. Some issuers follow guidelines that have been set for a credit card. For example, a credit card company's most basic unsecured credit card might have a preset $700 credit limit.

With a secured credit card, your credit limit is usually your deposit amount. But in most cases, you can get a credit limit increase by increasing your security deposit.

Some of the more elite credit cards offer what's called a "no preset spending limit." This means you aren't given a definite limit, but it doesn't mean you can spend with abandon, either. It's kind of a floating limit that changes with your spending habits, income and other factors that impact your credit.

Instead of telling you the maximum credit limit, some issuers state what the minimum limit will be if you are approved for the card. So, for instance, there might be a statement suggesting that if you're approved for the card, your minimum credit limit will be $5,000.

This doesn't mean everything is set in stone. You can always call your issuer and state your case for a higher credit limit. But don't try this unless you have a great track record on your credit report.

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Your credit report. This is a gold mine of information for a lender. It can see your payment history and determine if you pay your bills on time. It also looks at your credit limits on other credit cards.

A lender also considers the length of your credit history and the number of recent hard inquiries. If you have a long credit history and pay your bills on time, then you'll probably get a higher credit limit than someone who only has a few years' worth of history.

If your report shows a lot of recent inquiries, a lender might wonder if you're having financial trouble. Maybe you were just chasing sign-up bonuses, but it won't say that on your credit report. It will look like you desperately need credit. If you still get approved for the card, this will impact your credit limit (and not in a good way, because you look risky).

And, of course, the report also tells lenders if you have delinquent accounts or a recent bankruptcy. Even your demographic details that aren't included in credit score calculations help tell your story. If you've been employed and don't appear to have jumped from job to job frequently, that bodes well for you.

Your debt-to-income ratio. You might already know that your income is not a factor in your credit score. But here's where your income does matter. A lender looks at your DTI ratio to see if you have enough income to pay your credit card bill.

Your ratio is calculated using this formula: DTI = your recurring monthly debt / your gross monthly income (income before taxes).

Your debt includes things like rent, mortgage payment, car payments, credit card payments, student loans, alimony payments and any other type of debt you pay each month. The likes of utility, cellphone and internet service bills are not included.

Ever heard of the "28/36 Rule"? This is a gold standard used by many mortgage lenders. It means you should not be spending more than 28 percent of your gross income on housing. And your DTI, which includes all debt, should not exceed 36 percent.

When it comes to mortgages, the U.S. Department of Housing and Urban Development considers a DTI of 43 percent to be the cutoff for a loan. This is designed to prevent lenders from giving a mortgage to folks who really can't afford it.

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We're talking about credit cards, not mortgages, but it's still a good guideline to follow. A credit card issuer will consider your DTI ratio to determine if you can financially handle a larger credit limit.

Your credit score. Most issuers have a cutoff for the credit score they'll accept. But they also look at all the other factors listed above. If you're close to the cutoff and you've had stable employment, you might get consideration for that.

I wouldn't expect a high credit limit, though, if you barely make the cut. Issuers use the credit limit to help minimize their risk. So, if they take a chance on you, they'll offer a low credit limit at first to see if you can handle credit. Do a good job with it, and, in time, you can ask for an increase.

Beverly Harzog is a nationally recognized personal finance and credit card expert. She's the bestselling author of five books, including award winners, The Debt Escape Plan and Confessions of a Credit Junkie. She has appeared as a credit card expert on TV and radio, including CNN, Fox News, ABC News Now, NY1, WABC-NY, and Bloomberg Radio. Her advice has been featured in The Wall Street Journal, USA Today, The New York Times, Money, Kiplinger, Real Simple, and thousands more. As a consumer advocate, her mission in life is to help consumers stay out of--or get out of--credit card trouble. To connect with her, visit BeverlyHarzog.com.