The number that tells you how much you can charge on your credit card is known as your credit limit. It's a dollar amount that's set by your lender when you get approved for a new line of credit. But just how do lenders set these limits? For the most part, there are two primary factors that most lenders look at in order to set your initial credit limit: your credit score and income level.
1. Credit score
Your credit score is composed of six factors, in order of significance:
All of those factors boil down into a three-digit number (your credit score) that represents your creditworthiness and puts you into a credit rating category: poor, fair, good or excellent. Many credit cards have minimum credit score requirements, though these aren't always published by the lender.
2. Personal income
Your income also impacts your credit limit. Since your credit limit essentially tells you how much you can charge to your card, it's important for your lender to know you have the income to cover anything you charge.
Since 2009's Credit CARD Act, it was a requirement that applicants report individual income (instead of household income). This change was originally made to keep young adults from racking up credit card debt they couldn't pay off. However, it unintentionally kept stay-at-home spouses and partners from qualifying for credit. The Consumer Financial Protection Bureau lifted the restriction last month, and applicants can once again report household income.
Other things lenders consider
Your credit limit can change
Maybe you've been given a low credit limit to start. Don't fret! Your credit limit isn't set in stone. In fact, most credit card issuers will re-evaluate you as a customer every six months. If you've used your credit card responsibly, your issuer may decide to increase your limit.
On the flip side, if you've made some late payments or missed a bill, your issuer may find that reason enough to decrease your credit limit. A lower credit limit could inflate your credit utilization rate, one of the most important factors of your credit score.
Stay on track
After you get approved for a new credit card, use it wisely. Make at least the minimum payment on time each month (more if you can, to save on interest). And keep your credit utilization to less than 30 percent (but more than 0 percent) for a healthy credit score.
In no time, you should see your good habits pay off creditwise.
Bethy Hardeman writes about personal finance, credit and the economy for CreditKarma.com, a free credit monitoring website that helps more than 20 million people access their credit score for free.