Credit Scores & Credit Limit: Credit Scores vs. Credit Limit

A close-up of a cell phone held in the hand of a person with good credit management having a good credit score.

When helping people manage their credit scores, we often want people to know what their credit score and credit limit is. By knowing this, they can gauge how well they’re doing with their credit score as they work to improve their personal finances.

It’s important to start by understanding the meaning of credit scores vs. credit limits. Then, we can examine how the two are related and how they impact each other.

What Are Credit Scores?

Credit scores are numbers created by a credit rating agency based on information in your credit report. The most commonly used credit scoring models are created by FICO® Score and Vantage Score. Read more about credit scoring models here.

These credit scoring models assess your risk—the lower your credit score, the riskier it is for a credit issuer to give you credit cards with higher credit limits, new credit cards, or credit products such as auto loans, mortgage loans, or personal loans. The most common credit scoring model uses a range of 300 to 850.

To learn more about what makes up a good credit score, see “What is a good credit score?” And to learn more about how credit scores work, read “Credit Scores – How Do They Work?”

What’s a Credit Limit?

A credit limit is the maximum amount of money a credit card issuer offers to a borrower based on their own criteria. If you have a credit card with a $10,000 credit limit determined by the card issuer, then your credit limit is $10,000. If you had two such cards from different credit card issuers, 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 credit accounts total sum of credit limit determined by credit card issuers.

For more in-depth information about credit limit, read “What is a Credit Limit?

Credit Scores vs. Credit Limit

How your score impacts your credit limit

Like we said earlier, credit scores are a measure of your credit risk based on where you land in the credit score range. If you are a safe risk, a credit card company will be willing to offer you high credit limits on a new account or grant a credit limit increase on an active line of credit. If you are a higher risk, they will offer you lower credit limits and charge you more in interest rates until you have a higher credit score.

That’s not the only factor. Creditors will also look at your income level, employment status, current credit card balances, current line of credit, credit utilization ratio, credit behavior, average age of accounts, and other factors. Your income is not included at all in your credit score. So even if you have absolutely perfect credit, a financial institution won’t offer you more debt than you can handle based on your personal finances.

Credit reports with better credit scores in high credit score ranges usually lead to credit cards with higher credit limits, new credit cards, better auto loans, larger personal loans, and lower interest rates. Creditors will see a solid payment history and offer you a higher credit limit than they might to another borrower with the same income but a lower credit score.

Sometimes, high credit limits might attribute to a high credit score by coincidence. If you have credit accounts in good standing for many years in your credit history, creditors will typically adjust your terms and raise your maximum amount of credit limit from time to time based on account activity. What started as an introductory credit card with a low limit could grow into your primary credit card with the highest credit limit over many years. Similarly, your credit scores will rise over the years if you’ve been managing your credit mix, credit utilization rate, credit card debt, and not have outstanding debt from loans. You might start with a modest credit score and low credit limit today, and years down the road have a high credit limit and good credit score, but the two are both the result of your credit report showing good payment history, low credit card balance, and a low credit utilization rate over time.

How your credit limit impacts your score

One of the most significant factors in the credit scoring model is your credit utilization rate. You can read more about it in depth in our “What is Credit Utilization?” blog, but briefly, credit utilization rate is how much of your available credit card limit you are using. You have a per-card utilization rate, and a total 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 (according the the credit bureau's credit scoring models), after your payment history. If your utilization rate goes up, your score will go down, and vice versa.

To get the best impact on 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 by the credit scoring models—those are FICO’s trade secrets—but it’s been said that an optimal utilization rate is above zero.

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 it could be better. Now, if you close one credit recently, your credit limit is now $10,000, and the $5,000 in debt owed means your utilization rate shoots up to 50%. That’s a big 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.”

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. If you’ve had an account for a while, it is benefitting you in that area. Close the account, and you will see the effect your credit scores go through on 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 the credit reporting agencies for the score.

Yes, credit reports are free, and you can learn how to get a free credit 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 credit score, 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, Credit Karma, 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.

Remember: It’s Not About Personal Finance

We want to reiterate something important—your credit score is not based on your personal finance. The actual credit limit you’ve been granted isn't your score.

Utilization is a percentage of your total credit 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 interest charge on debt.

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 in this situation all the time.

A credit report review is where we start; a credit report review helps you figure out where you stand and allows us to create a concrete plan of attack to improve your score. Over time, you'll have a great-looking credit report.

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. Our debt counselors can help you manage your debts, achieve a better score, and succeed in achieving financial freedom.

Join us at our upcoming webinar happening this year for free! For more details on these events and to register, please visit https://credit.org/events/

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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