Why did I get a low credit limit on a credit card?

A credit card allows you to spend money today and pay it off tomorrow. Whether you have a big-ticket item or purchase everyday items, you can charge it on your credit card. Most credit cards offer lucrative rewards, and you can build your credit report to access more financial products.

While your credit card is a powerful tool in your wallet, it's essential to understand your credit limit to manage your credit card account responsibly. A credit card issuer uses several factors to assess you for a credit limit increase, and they can deny your request. Here's what you should know about credit limits and why yours might be lower than you want.

What is a credit limit?

Your credit limit is the maximum amount you can spend on your credit accounts, such as credit cards, lines of credit, and personal loans. When you spend money using your credit card, you're borrowing money from the credit card issuer and agree to pay off the balance when they give your credit statement. The purpose of credit limits is to minimize the creditor's risk when they lend you money.

Why does a lower credit limit matter?

A lower credit limit lowers the amount you can spend on credit. If you rely on your credit card for daily purchases and want to rack up more rewards, a low credit limit reduces your opportunities to maximize rewards compared to a higher credit limit. It can be harder to earn points or cash back to redeem for savings and discounts on your favourite purchases, like travel and gift cards.

A low credit limit can also increase your credit utilization ratio, negatively affecting your credit report. Your credit utilization ratio is the percentage of your available credit you use. Experts recommend keeping your credit utilization rate at around 30% to avoid lowering your credit score. Since credit card issuers and lenders use your credit report to evaluate your eligibility for new credit and financial products, a low credit limit and a high credit card utilization ratio can be a bad combo.

What are the benefits of increasing your credit card limit?

A high credit limit has several benefits to help you build a strong financial portfolio as long as you manage your total credit responsibly and avoid credit card debt. Besides giving you additional credit to spend monthly, here are some advantages of increasing your credit limit.

More purchasing power

When you have a higher credit card limit, you have more credit allowance for purchases. Your current credit limit may not be able to handle your monthly expenses or the occasional big-ticket items you budget for. Increasing your credit limit increases the maximum amount you can spend on credit, and you can swipe your card more times every month without worrying too much about maxing out your credit card.

An emergency back-up

While your emergency savings should be your first line of defense in financial emergencies, sometimes you need a plan B. You may not have an emergency savings yet, or you already used it up, and it's still not enough. Whatever the case, your credit card can be your plan B as an absolute last resort to hold you over until you can get back on your feet. Be careful to consider how much you add to your credit card balance and whether you can repay your total debt on time.

Improve your credit score

Your credit limit and monthly expenses determine your credit card utilization ratio and a lower limit can increase your utilization rate even when your expenses aren't high. Higher credit limits give you more room to spend money and a higher chance of staying within the 30% recommended utilization rate.

Credit card companies report your credit utilization rate to credit bureaus, which use this number, along with information about your credit and payment history to give you a three-digit score assessing your financial situation. A higher credit limit can help boost your credit score and give you access to a wider range of financial products, better loan terms, and lower interest rates.

Are there cons to have a higher credit limit?

Take a look below at some of the cons to having a high credit limit:

More total debt

A higher credit limit increases the chances of overspending, raising your total debt. Debt can have serious consequences, especially if you carry a credit card balance frequently and struggle to make on-time payments. While there are ways to get out of debt, like using a balance transfer credit card, it's best to avoid accumulating more debt with higher available credit. If you request a limit increase, ensure you have the money to pay off your balance each month.

Hard credit check

Most credit card companies conduct a hard credit check when reviewing your credit increase request. Your credit report shows how much new credit you applied for, so increasing your card's credit limit can have a negative impact on your credit score. Your credit card company may have concerns if you have too many hard credit checks in a short period.

Ways to increase your credit limit

There are a few ways to ask for a credit limit increase if your current one is too low. Healthy financial behaviours, such as a long credit history, no late or missed payments, a higher credit score, and a good credit mix all indicate you can responsibly handle a higher limit on your credit card.

A customer-initiated limit increase

You can ask for a credit limit increase through the mobile application or website or by going to a physical branch. You can indicate what you want your new credit limit to be. Your credit card provider will likely conduct a hard credit check by pulling out your credit score and credit history. Based on the information they find, they can approve or deny your request.

A lender-initiated limit increase

Many credit card companies screen and preapprove cardholders for a credit limit increase on their existing credit cards if the cardholder displays financial responsibility and stability. You can accept the automatic increase if you want more credit.

Why credit limit increases are declined

A credit card issuer can decline your request for more credit for various reasons. Most traditional lenders have higher requirements to approve individuals for a new credit card or a credit limit increase to decrease their risk of borrowing money. If you have too low of a credit score, a bad payment history, too many recent applications or new credit accounts, or insufficient income, your credit card issuer may not want to give you more credit.

Does asking for a credit limit increase affect your credit score?

Asking for more credit can affect your credit score depending on your credit card issuer. Some lenders do a hard credit check to determine whether you qualify for an increase, while others do a soft pull of your information. Hard checks show up on your credit report and can hurt your score. While your score may decrease, the effects are usually temporary and can increase again as long as you manage your credit responsibly.

How often can you request a credit limit increase?

You can submit as many credit increase requests as you want. However, that doesn't mean it's a good idea. Too many hard inquiries into your credit report can lower your score, and bad credit can have negative consequences. Bad credit can impact your chances of getting approval for new credit and subject you to higher interest rates or stricter loan terms.

If you increase your limit too much and rack up a high credit balance, it can be difficult to pay off your credit card debt. Getting out of debt can be challenging, so it's best to avoid having too much debt. Before asking for more credit, consider whether it fits within your budget and spending habits and whether your current income is enough to handle potentially higher expenses. If the answer is yes, and you feel confident about repaying your credit card balance on time each month, getting more credit can be a great way to build credit.

Alternatives to a credit limit increase

Apply for a new credit card

Instead of requesting a higher limit on your existing credit card, you can try applying for a new one. Many credit cards offer lucrative rewards, so you can consider something that maximizes your earnings and savings in the categories that fit your lifestyle. The timeline to get a credit card depends on the issuer. The lender typically conducts a credit check and verifies your employment and income information. Some credit cards have annual fees or minimum income and credit score requirements.

Apply for a line of credit

A line of credit is a type of loan allowing you to borrow money up to your limit to buy whatever you want. You can repay the borrowed amount anytime. The interest rate on a line of credit fluctuates, and you pay interest from the day you withdraw cash when you pay it back fully. Your credit score can influence the interest rate you get on your line of credit.

Get a personal loan

Personal loans allow you to borrow a preapproved amount of money and pay it back over a specific period. Lenders expect you to pay back the full amount with any applicable fees and interest charges based on the loan terms. They may ask about your current income, bank account, and permanent address before giving you a personal loan. You may get a secured loan, which requires collateral, or a nonsecured loan that doesn't require one.

Get instant approval for a credit card with KOHO

Whether you want more credit on your existing credit card or want to apply for a new one to add to your wallet, we can help. Get instant approval for a virtual credit card to start spending online and in-store at your favourite retailers. You earn cash back on every dollar and manage your subscriptions and spending habits to stay organized and on track with your goals.

You can get a free credit score to monitor your financial well-being and make adjustments to improve. A good credit score makes it easier for you to qualify for a credit limit increase, as well as new credit accounts, better loan payments, and lower interest rates. Apply for overdraft protection coverage. You can repay your debts, so you don't have to worry about penalties or interest charges if you go over your limit as long as you pay the coverage subscription fee in full on time.

Start building your credit with KOHO with a credit card or earning interest with a high-interest savings account today.