What is a Credit Limit?

A credit limit is the amount of available credit allotted to you on a particular revolving line of credit. Consumers most often come into contact with credit limits when they are referring to credit cards, although they do appear on lines of credit as well. A credit limit is the amount of money you can borrow on a particular credit card. Each credit card comes with different credit limits based on different factors and these limits can either increase or decrease based on different criteria and fluctuations in your credit score or income

How to Increase Your Credit Limit?

Consumers can try to increase their credit limit if they so choose. The process isn’t very difficult but it requires good credit. You can usually put in a request on your banking application or you can also call to request a limit increase over the phone. In order to process the request, the credit card company will typically ask for your income and maintaining good credit will certainly help your case. Income is typically not verified via forms or other documentation, this is usually something that the credit card company takes on good faith. Since you aren’t typically required to provide proof of income, you are safe to estimate what your annual income is on the limit increase questionnaire/form.

Inflated Credit Limits

Since many credit card companies don’t require consumers to show proof of income on credit limit increases, there does tend to be an excessively high amount of credit availability on many credit cards. Some consumers have tens of thousands and even hundreds of thousands in available credit accrued over the years, much of which is usually underused. However, the excess is definitely there and there are scenarios in which some consumers start using all that available credit and find themselves in serious trouble.

Credit Limits Impact on Credit Score

In theory, the more available credit you have, the better your credit score should be. Although there is a limit since this part of the credit algorithm is percentage based, this fact still holds true. The less you use of that available credit, the better your score will be.

Utilization

Your utilization rate accounts for approximately 30% of your credit score and is part of the reason why the more available credit you have, the better your credit score becomes. Essentially, the more credit you have available and the less you use, makes you appear as a better candidate for credit in the eyes of the algorithm. Since you don’t currently need any of the credit you have available currently, you are considered more likely to payback what you owe in a timely fashion.

Why Don’t Credit Limit Increases Require Income Verification

Most credit limit increases don’t require income verification because the system currently “works” in its current capacity. If it’s not broke don’t fix it, as they say. However, this process does mean that more bad credit score applicants and “credit seeking individuals” slip through the cracks. There are unfortunately some people trying to game the system and take advantage of large amounts of available credit. Those individuals that game the system often times end up messing it up for everyone but this tends to be a small percentage of the population.

Credit is a tool to be used by those that want to either improve their credit score or have a more significant amount of available credit. However that tool can also have significant drawbacks if not used properly. Make sure you understand that and understand what happens when you go over your credit limit.