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Are you in Good Hands?


Some numbers in life are easy to interpret: Your cholesterol levels say something straightforward about your health, while the number of dollars stashed in your 401(k) is a quick measure of how close you are to your retirement goals.

But what about your credit limit, the amount a bank will allow you to borrow before cutting you off? Should you rejoice if your credit card company ups your limit without your asking? Is it time to panic if your limit is sliced in half? And what does it all mean for your credit score?

Did You Know?

60% of U.S. adults have not looked at their credit score in the past year

Fewer than 2 in 5 U.S. adults carry credit card debt from month to month

Where It Comes From Banks don’t determine your initial credit limit by drawing numbers out of a hat. They want to figure out how risky it is to lend you money. Card issuers generally focus on two numbers:

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1. Your credit score, which is derived from factors such as whether you pay your bills on time and how close you are to maxing out your other cards.

2. Your income, which is used to gauge whether you’ll be able to cover your purchases.

When They Raise It If your credit limit is bumped up, it’s generally because you’re paying your bills on time and behaving responsibly with the card. So the bank is willing to trust you with a higher limit. (Typically, banks reassess your credit limit every six months.)

But if it happens, don’t go on a spending binge to celebrate! Why? Your so-called credit utilization rate, which gets calculated by dividing your total balance by your total limit, across all of your cards, will automatically look better with a low balance. A sunnier credit utilization usually translates to a better credit score.

Why They Lower It (and What You Can Do) The bank reads missing payments, late payments or payments made with other credit cards as signs that you may not have the means to repay the money you borrowed. And a lowered limit can hurt your credit utilization, too, which might in turn harm your credit score.

Don’t ignore a reduction and hope it will go away. Instead, call the bank and ask for an explanation. Armed with that information, you can start addressing the problems that caused them to lower your limit. Remember, when it comes to credit limits, what goes down can also go back up.