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Experts agree there’s no such thing as the perfect credit card—each one represents a compromise between costs and benefits for each individual cardholder. That said, not all credit cards are created equal. Credit limits are one example of an important characteristic that can fluctuate dramatically among cards. Read ahead to learn more about high-limit credit cards and whether pursuing one is right for you.
What Is a High-Limit Credit Card?
The flexibility and borrowing power of high-limit credit cards is sure to entice prospective cardholders. It’s important to understand what a high credit limit really means when using it as a factor to compare cards.
What Is a Credit Limit?
With any revolving credit account like a credit card, a credit limit establishes the maximum amount of credit made available by the lender. Buying something on credit allows the customer to purchase it immediately, essentially using someone else’s money with the trust that this money will be repaid later.
Like any type of lending, credit card plans not only build in disincentives for coming short on repayment but also often limit how much credit is extended in the first place. In this way, a credit limit is like the stated dollar value of a loan from a bank—it’s as much of “someone else’s money” as the debtor is granted to use.
How Do Credit Limits Work?
Credit limits on credit cards are tailored to the individual credit card applicant rather than to the card itself. Lenders determine a credit limit through a number of factors, including the prospective borrower’s credit history, perceived ability to pay (based largely on income) and the nature of current borrowing activity (credit utilization ratio, amount of debt, number of existing loans or accounts, etc.).
Credit limits are related to but distinct from available credit, also known as the available balance. While a credit limit is a fixed value indicating overall borrowing power, a cardholder deducts from available credit every time they swipe. The available credit then goes back up when credit card payments reduce a balance and will match the credit limit when an account is fully up-to-date. Available credit can be thought of as the difference between one’s credit limit and accumulated debts, or current balance.
What Does It Mean To Have a High Credit Limit?
According to a report by Experian, the average credit limit for a U.S. citizen across all of their credit cards is roughly $30,000. Terminology will vary on what might be considered a high limit for an individual card, and although we often deem any limit above $5,000 as high, limits can range well into the tens of thousands of dollars.
While credit limits are most often compared among different credit card plans, limits can also be high or low relative to the cardholder’s overall financial standing. This way of assessing credit limits is just as important because a credit limit can be a higher amount than one might actually have available to put towards a credit card bill. This is what makes high credit limits something of a double-sided card.
What Are High-Limit Credit Cards?
A high-limit credit card is one extending a relatively generous amount of monthly credit to the user. This type of card is subject to the same credit utilization ratios as any other card, meaning a cardholder shouldn’t expect to actually borrow and spend anywhere near the full value of their limit. In order to maintain and improve credit, it is advised that cardholders spend no more than 30% of overall available credit across all accounts and ideally between 1% and 10%.
How To Get a High-limit Credit Card
Apply for a higher-limit card the same way you would any other credit card. To be approved, however, you must meet the card issuer’s criteria for the credit card and limit you seek. This is based largely on your current and past credit use. Most issuers do not allow a potential cardholder to request a specific credit limit upon application, however.
This means that the best thing you can do to secure a card with a high credit limit is to maintain good stats as a borrower, including credit score, debt-to-income ratio and credit utilization ratio. Perhaps most important is simply having sufficient credit history and a good relationship with the lender if one already exists. Check out our guide to increasing your credit limit for more details on requesting a limit increase from card issuers.
While it’s clear that card issuers will make their own judgements about an applicant’s creditworthiness (trustworthiness as a borrower), often overlooked is a cardholder’s own assessment of their fiscal discipline and whether it suits them to a high-limit card. Securing a new high-limit card or requesting a credit limit increase can easily lead to overspending, as the temptation to spend first and think later can grow as easily as a balance on a card with a high limit. Combined with making only minimum monthly payments and high interest rates associated with reward cards, overspending can lead to debt and credit damage.
How Does a High Limit Affect My Credit?
When people talk about credit, they’re referring to credit history—success or failure with past borrowing—and likely referring specifically to a credit report or credit score. A credit report indicates one’s creditworthiness to a lender based on credit history, while a credit score attempts to represent this assessment with a single figure. These important metrics can be impacted either positively or negatively by how one navigates credit limits.
A cardholder’s credit utilization ratio indicates spending as a proportion of your combined credit limit across all accounts and remains one of the most consequential factors used to determine credit score. The lower the utilization rate, the more responsible someone appears to lenders; the higher the rate, the more they appear in debt and risk suffering credit score losses.
While cardholder spending impacts credit utilization ratio, credit limit is the other half of the equation—meaning increasing a credit limit stands to lower one’s utilization rate and improve credit if all other variables remain equal. For the best credit score outcomes, cardholders should balance spending and credit limit such that they rarely spend more than a fraction of the overall limit. Not spending more than 30% of your overall available credit is advisable, but keeping your credit utilization below 10% is ideal.
Credit Card Interest Rates
A credit card’s interest rate is the added cost of borrowing money when it hasn’t been paid back in full on time. Most credit card users can avoid paying any interest so long as they make monthly payments, though carrying credit card debt and accruing interest payments is still quite common. APR (annual percentage rate) expresses how much interest a credit card charges as a yearly figure.
What Is a Good Interest Rate on a Credit Card?
The lower the APR, the better for the cardholder. According to Federal Reserve data, the average interest rate for U.S.-based credit cards have been roughly 16% to 17% during the past several years. Currently, the average credit card APR is 24.12%, though this can vary based on card issuer and the specific terms offered to you based on creditworthiness.
Because of the many variables in selecting a credit card, interest rates are only one factor you must consider to determine a card’s cost-effectiveness. However, good interest rates that fall below the national average are seen as desirable and should be included in the decision-making process; even if you plan never to carry a balance, a lower APR is desirable in case you ever don’t have a choice.
How To Lower Your Credit Card Interest Rate
Credit cards are not a cost-effective way to borrow money for longer than a month, as even an interest rate that’s modest by credit card standards looks expensive when compared to other forms of borrowing. Cardholders with any reason to suspect they’ll accrue interest may be interested in trying to lower their credit card’s interest rate. Those with a responsible borrowing history and a good relationship with the lender are often able to do this, as credit card issuers don’t want to lose the customer to another company offering a lower APR for a similar product.
For the best chance at getting a card issuer to lower one’s interest rate, consider these pieces of advice:
- Provide a legitimate reason for someone at the company who wants to help to do so, such as proving that competitors are beating their current offering.
- Be truthful about credit—they’ll see a cardholder’s credit history anyway.
- Be polite—look to “catch more flies with honey,” as the saying goes.
- Learn more about how to lower your credit card interest rate for further details on the steps you can take.
Bottom Line
It’s easy to see why high credit limits remain an attractive prospect to all sorts of credit card users. Being approved for a high-limit credit card is a sign of good financial standing, while working toward this represents an excellent goal for cardholders still building a robust credit history.
However, there can still be downsides to pursuing a high credit limit. That’s why it’s important to understand the terms of the credit card you do have so that it can be used responsibly and contribute to good credit down the road.
Frequently Asked Questions (FAQs)
What’s the difference between available credit and a credit limit?
Available credit, or available balance, describes how much of a cardholder’s credit limit remains accessible. It represents the real-time difference in value between your credit limit and your outstanding credit card charges. A credit limit is a fixed value and is a more useful metric for comparing plans.
What happens if I go over my credit limit?
Typically, your card will be declined when you attempt to make a purchase when your credit limit is exceeded. Depending on the credit card agreement, however, the card might instead continue to function while the issuer imposes a stiff penalty fee or penalty rate for exceeding the limit. It’s important to be familiar with the specifics of your agreement so you know what to expect.
Should I increase my credit limit?
While a high credit limit can be advantageous to one’s financial flexibility and credit utilization ratio as described above, there may also be downsides to increasing a credit limit. Requesting a change may result in lenders making a hard inquiry on your credit report, which can be detrimental to your credit score, if only temporarily.
An increased limit also does nothing for credit utilization metrics if renewed spending keeps pace with (or exceeds) the increase, so cardholders who request a higher limit should have a goal for doing so and a clear plan for future spending. Similarly, cardholders should be sure they’re not making themselves more vulnerable to overspending before seeking an increase.
