What is a Credit Card Limit?

Once your credit card application is successful, it comes with a credit limit which signifies the maximum amount you can borrow. A credit card is a payment card issued by financial institutions or a financial service provider.

This card allows its users to borrow funds that they can use to carry our transactions and pay for goods and services with merchants accepting card payment.

You must repay the borrowed money with a credit card alongside any applicable interest with additional agreed-upon charges. These payments can be made in full by the billing date or split over time. The credit card provider sets a credit limit, and several factors influence the limit you get.

What is Credit Card Limit in Canada

The credit card limit is the maximum balance on your credit card. This is the amount your card issuer permits you to have at a time. The size of your credit limit influences your purchasing power with your credit card. The more significant your credit limit, the more you can purchase and carry out transactions.

As soon as you reach your credit limit, your lender will restrict your card from making any further transactions until you pay off some of your outstanding balance. Most credit card issuers use various factors to establish the credit limit for credit cards. If they are unable to evaluate your worthiness, you might not get a tangible credit limit.

Factors That Determines Credit Limit in Canada

Several factors influence your credit limit in Canada; among them are:

  • Your type of credit card

All credit cards are not the same. They might have similar features, but each has its distinctive features. The credit limit you get depends on the credit card you possess. Some credit cards already have a predefined credit limit.

This credit limit is what every cardholder receives, irrespective of other factors.  While on the other hand, some credit cards come with a credit limit rate. If you possess one of these cards, your card issuer will assign you a credit limit within a rate deemed suitable for you.

If your application is exceptional, you may get approvals for a credit limit on a higher range. Since credit card issuers do not publicize their credit limits, it is advisable to get a suitable card for your purchasing needs.

  • Your Income

Your income is another factor that influences the credit limit you get. Generally,  your income affects the amount you can afford to repay. However, there are no guarantees if you’ll get a higher credit limit with a high income or not. You can increase your chances of getting approval for a higher credit limit by having a high income.

  • Your Debt-To-Income Ratio

Your credit card issuer will leverage the details on your credit report to evaluate your application. This will give your issuer enough information to estimate your debt-to-income ratio.

Your debt-to-income ratio can influence your credit limit. This means that a high income offset by high debt payment could lead to a  lower credit limit. Unlike if you are spending fewer funds on debt repayment monthly. It is recommended to spend at least 30% of your credit limit. It is not advisable to go above your assigned limit.

  • Your Credit History

Your financial behavior will influence the decision of your lenders. How you’ve handled credit limits on your credit cards will determine whether or not you will get approval for a new credit card. It will also affect the credit limit will be assigned.

Any late payments, high balances, and other negative remarks on your credit history will lower your chances of getting a new credit card and a high credit limit.

  • Credit Limits on Other Credit Card

If you possess more than more credit card, the issuer will likely review how you’re managing your other card. Once a credit report review shows you have a high credit limit on your other credit cards, you have a higher chance of getting approval for a high credit limit on a new credit card. However, if your credit report shows otherwise, you might not instantly get a high credit limit.

  • Credit and Income Details of Co-Applicant

If you apply for a new credit card jointly with a partner, your card issuer will review you and your partner’s income and credit qualification. This will be used to determine the credit limit.

Unless you offer money as collateral to obtain a credit line or a secured credit card, your bank balance and other asset do not influence your credit limit. With the factors mentioned above, you might get a low credit limit if

  • Your income is low
  • You have a high debt-to-income ratio.
  • You are new to credit or
  • You are rebuilding your credit history.
  • The credit limit on your other credit cards is low.

How Credit Limit Works in Canada

Only your credit card issuer can determine your credit limit. Your issuer does this when you apply for a credit card or line of credit. Your issuer will review your income, current debt level, and credit history to decide your credit limit.

Any negative remark on your credit history like late payment, or high debt-to-income ratio, you might not get a high credit limit. However, you can request an increase in credit limit subsequently when you meet the criteria. Also, you can decline the credit card if you’re not comfortable with the credit limit.

Note that your credit limit will not be made known once you apply for a credit card until you’ve completed your application and have gotten approval for a credit card.

If you are applying for a secured credit card – this is a card guaranteed by a card deposit, your card issuer will give you a credit limit equal to your security deposit. It is crucial to bear in mind that your credit limit might fluctuate.

Once you get approval for a credit card, you can find your credit limit on your billing statement. You can do this by logging into your online account or call your credit card customer agent to learn more.

Credit Limit Utilization

With your credit card, you can make transactions up to your credit limit. You might be unable to exceed your credit limit if you haven’t opted-in to having over-the-limit transactions processed.

Hence, any purchases above your credit limit will be declined. Note that if you’ve opted-in this, you might be charged an over-the-limit fee for exceeding your credit limit. This can also prompt a penalty rate – this is a higher interest rate charged by your issuer in specific situations.

Your credit limit also influences your credit score as both your card balance and credit limit are reported to the credit bureaus monthly. The CRA uses the data to calculate your credit utilization – this is about 30% of your credit score.

If you utilize your credit card responsibly and make timely monthly payments, your issuer might approve a periodic credit limit increase for you without you having to request it. Your issuer can decrease your credit limit if you’re irresponsible with your payment or your debt increases to a level that your issuer perceives as risky.

Conclusion

Your credit card limit is the maximum balance on your credit card or line of credit – a line of credit a flexible loan issued by a bank or credit union. This is the limit your issuer permits you to reach without being penalized.

The limit is determined by your issuer when you apply for a card. You can carry out transactions using your card up to your limit and may not be able to exceed your limit if you have not opted-in for over-the-limit transactions.

Note that some credit cards do not have an established credit limit; hence they fluctuate your limits based on your current financial behaviors, income, credit history, etc.

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