When helping people to manage their credit, we often want people to know what their credit score is, and what their credit limit is, so they can gauge how well they’re doing as they work to improve their personal finances.
It’s important to start by understanding the meaning of a credit score vs. credit limits. Then we can examine how the two are related and how they impact each other.
Credit Score Definition
A credit score is number created by a credit rating agency based on information in your credit report. The score assesses your credit risk—the lower your score, the riskier it is for a lender to give you a loan. The most common credit scores used are generated by FICO, and range from 300 to 850.
Credit Limit Definition
A credit limit is the maximum amount of money a lender offers to a borrower. If you have a credit card with a $10,000 maximum balance, then your credit limit is $10,000. If you have two such cards, you would have a total credit limit of $20,000. To get to your total credit limit, you need to add up all of the total available balances you have.
For more in-depth information about credit limits, read “What is a Credit Limit?”
Credit Scores vs. Credit Limits
How your score impacts your credit limit
Like we said earlier, the credit score is a measure of your credit risk. If you are a safe risk, creditors will be willing to lend more to you. If you are a higher risk, they will offer you less, and charge you more in interest.
That’s not the only factor, of course. Creditors will look at your income level too, and your income is not included at all in your credit score. So even if you have absolutely perfect credit, lenders won’t offer you more debt than you can handle based on your earnings.
But better credit scores do usually lead to higher credit limits. Creditors will see a solid payment history and offer you more money than they might to another borrower with the same income but a lower score.
Sometimes, a high credit limit might accompany a high credit score by coincidence. If you have an account in good standing for many years, creditors will typically adjust your terms and raise your rate from time to time. So what started as an introductory card with a low limit could grow into your primary account with the highest credit limit over many years. Similarly, your score will rise over the years if you’ve been managing your credit responsibly. So you might start with a modest credit score and low credit limit today, and years down the road have a high credit limit and high score, but the two are both the result of your good payment history over time.
How your credit limit impacts your score
One of the most significant factors in your credit score is your utilization rate. You can read more about it in depth in our “What is Credit Utilization?” post, but briefly, utilization is how much of your available credit limit you are using. You have a per-card utilization rate, and an aggregate utilization rate with all of your cards added together. So if you have a $10,000 credit limit and currently owe $5,000, your utilization rate is 50%.
Your utilization rate is the second most important factor to your credit score, after your payment history. If your utilization rate goes up, your score will go down, and vice versa.
To get the best impact to your credit score, you should strive to get your utilization rate below 10% and keep it there. We don’t know the exact formulas used—those are FICO’s trade secrets—but it’s been said that an optimal utilization rate is above zero. The idea is that you need to use credit actively to generate a good score. So you want a utilization rate that isn’t zero, but keep it under 10% for the best impact to your credit score.
Conversely, if anything happens that shoots up your credit utilization rate, your score will drop. Sometimes this is as simple as maxing out a card, but it can also happen if you close an open account. In that case, you lose that part of your available credit limit immediately, and your utilization will suffer.
For example, suppose you have two cards with $10,000 credit limits. That’s a total credit limit of $20,000. You owe $5,000, for a utilization rate of 25%. That’s not terrible, but could be better. But then if you close one of those two credit card accounts, your credit limit is now $10,000, and the $5,000 you owe means your utilization rate shoots up to 50%. That’s a big drop change at once, and your credit score will suffer.
You can also get a similar impact if your creditor closes the account or lowers your credit limit. FICO writes on their myFICO site. “It doesn’t matter to your FICO score who closed your account—you or the lender.”
And when it comes to closing accounts, it’s not just your utilization rate that has an impact. Part of your credit score is based on the length of your credit history, and if you’ve had an account for a while, it is benefitting you in that area. Close the account, and you will eventually lose that benefit when the account is removed from your credit report.
Getting Your Credit Score
We talked about calculating your credit limit, and that’s pretty straightforward. But getting your credit score isn’t as simple—you typically have to pay for the score.
Yes, the credit report is free, and you can learn how to get a free report here. But to get the score, you’ll be asked to pay extra. Buying a score at the annualcreditreport.com site will get you a VantageScore, and getting a score from myFICO.com will get you your FICO score. If you have to pay for a credit score, you can get a better deal by combining that purchase with fraud protection from a third party.
There are some free sources of credit scores, from sites like Quizzle, CreditKarma, and CreditSesame. We urge people to be careful when getting free scores anywhere—be sure you’re not signing up for any subscriptions that will be hard to cancel later. Often, it’s better to just pay up front to get the info you need.
It’s Not About Income
We want to reiterate something important—your credit score is not based on your income. The actual credit limits you’ve been granted aren’t in your score. The utilization is a percentage of your total limit. It doesn’t matter how high or low that limit is, it’s how much you are currently using that matters. There is no reason to carry a balance from month-to-month and incur interest charges on any credit card to boost a score, pay the account off before the due date to avoid finance charges.
Now, naturally, it’s easier to maintain a healthy 10%-or-lower utilization ratio when you have a very high credit limit, but it’s not impossible for people with modest incomes to keep their utilization rate low and their credit score high. We help people do that all the time. A credit report review is the place to start, as it helps you figure out where you stand and gives you a concrete plan of attack when it comes to improving your score over time.
Obviously, getting a 10% utilization rate isn’t going to be simple for everyone. Paying down debt to that level might take work and planning. A credit coach can help you manage debts, leading to a better score and success in achieving financial freedom.