What Should My Credit Limit Be Based on My Income?

Do Lenders Look at Income to Determine Your Credit Limit?

Yes, lenders typically ask you to state your income when applying for a credit card, and they may ask for verification in the form of a pay stub or income tax return. While this information is used in calculating your credit limit, it is not the only factor.

Learn more: Why Do Credit Card Issuers Ask Your Income?

What Should My Credit Limit Be Based on Income?

While a higher income can sometimes help you qualify for a higher credit limit, there is no formula for determining credit limit based on income alone. Lenders are typically less interested in income per se than in the amount of income left after you pay your other debts each month, because those are funds you can use to make payments on a new credit card.

To gauge your capacity for paying off new debt, lenders use a measurement called debt-to-income ratio (DTI)—the percentage of your monthly income that goes toward paying loans, credit cards and other consumer debts. This is calculated using income data you provide with your card application and debt information the lender finds when it checks your credit reports at one or more of the national credit bureaus (Experian, TransUnion or Equifax).

From a lender's point of view, the lower your DTI, the better. Still, there's no direct correlation between DTI and credit limit. Each card issuer determines a range of DTI ratios that are acceptable for any given card, and DTI ratio is just one factor they use to determine your credit limit.

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How Lenders Set Your Credit Limit

In addition to DTI ratio, credit card issuers weigh a number of other factors when setting credit limits—none of which have a direct connection to your income. Here's an overview of what might come into play.

Your Creditworthiness

Your credit reports record your history of debt and repayment, and credit scores are derived from credit report data. Credit reports do not include income information, and income has no direct bearing on credit scores.

Your payment history is the single most important factor in calculating your credit scores. Even one payment that's late by 30 days or more can do significant harm to credit scores.

Your Credit Utilization Rate

Your overall credit utilization rate is the amount of credit you're using on your revolving credit accounts (such as credit cards), stated as a percentage of your total revolving credit limit. Lenders may view high utilization rates as a sign of over-reliance on credit, and utilization rates that exceed about 30% can cause your credit scores to decline.

Card Attributes

Card issuers tailor different credit cards to different target users—college students, business owners or frequent travelers, for example—and credit limits can vary according to the intended borrower profile. A borrower seeking their first-ever credit card, for instance, might only qualify for a relatively low credit limit, even if they had a very low DTI ratio thanks to high income and low debt.

Economic Trends

Along with factors related to your credit and payment history, conditions outside your control also can affect credit limits. When global or regional economic conditions hit a slump, everyone affected is statistically at greater risk of inability to repay their debts.

In response, lenders may seek to reduce their exposure by increasing credit standards, reducing credit limits for new customers, and even lowering the credit limits of existing borrowers.

How Does Your Credit Limit Impact Your Credit Score?

Over the long term, increasing your total credit limit by opening new credit accounts or expanding the borrowing limits on existing ones gives you flexibility and, as long as you pay your bills on time each month, shows lenders that you can handle multiple accounts and greater capacity for debt. Managing a mix of accounts and making consistent on-time payments can promote steady credit score increases.

Changes in credit limit also can cause more sudden, significant changes in your credit scores by altering the credit utilization ratio represented by outstanding balances on your revolving accounts. Raising your total credit limit, by opening a new account or getting a credit limit increase on an existing one, "dilutes" your overall utilization.

Example: How a Higher Credit Limit Impacts Your Score

Say you have two credit cards: one with a $4,000 credit limit and an $800 balance, and another with a $2,000 credit limit and a $400 balance. Here's how you would find your total credit utilization ratio:

• ($800 + $400) / ($4,000 + $2,000) = ($1,200 / $6,000) = 20%

Now, let's say you open a new credit card account and get a spending limit of $6,000. If you haven't made any charges on the new card (so its balance is zero), your credit utilization ratio becomes:

• ($800 + $400 + $0) / ($4,000 + $2,000 + $6,000) = ($1,200 / $12,000) = 10%

This newer lower utilization can help boost your credit scores.

Example: How a Lower Credit Limit Impacts Your Score

Now say one of your lenders lowers the credit limit on one of your credit cards. The reduction in your overall credit limit raises your utilization.

To understand this effect, let's revisit our original two-card example. If the lender lowers the credit limit on one card from $4,000 to $2,000, your utilization ratio becomes:

• ($800 + $400) / ($2,000 + $2,000) = ($1,200 / $4,000) = 30%

The newer higher utilization can hurt your scores, especially when it reaches around 30% or above. Those with the highest credit scores typically have a credit utilization in the single digits.

Learn more: What Is a Credit Utilization Rate?

How to Increase Your Credit Limit

If you want to increase the credit limit on a card you already have, you can ask the company to increase your credit limit. This may only be available after a certain period of time of responsible card use, such as six months, but it can be a valuable tool if you want to increase the amount you have available without applying for a new card.

1. Ask your card issuer for an increase. Don't feel bashful: Fielding requests for credit limit increases is standard procedure for credit card issuers. Your account's app or dashboard may have a tab or link you can use to get an instant decision on a request for a credit limit increase. Or, you can call the number on the back of your card to ask.
2. Wait for a decision. You may receive a decision right away, especially if you submit a request online. If not, it may take several days to receive a decision.
3. Spend responsibly. Now that you have a higher credit limit, avoid the temptation to use it all to go on a shopping spree. Use credit only when you truly need it, and plan to pay down your balance to avoid extra fees, a ballooning balance and potential credit damage.

Your credit card issuer may not approve your request for an increase. If this happens, you can call the issuer to see if there are other options. You also may receive an adverse action letter where the issuer gives you the credit-related reasons why your request was denied. Look at this letter to find ways you may improve your credit, taking steps to set you up for a successful credit limit request in the future.

Learn more: How to Use a Credit Card Responsibly

The Bottom Line

Income is just one of many factors lenders consider when setting credit limits, and there is no simple formula for calculating credit limits based on income alone. While greater income can bring higher credit limits, increasing your overall borrowing capacity also benefits from building a solid history of on-time payments, working on steady increases to your credit scores and avoiding excessive balances on your revolving credit accounts.