How credit limits are set, and what happens if you go over

A credit limit is the most you can owe on a credit card at one time. Card issuers set it when they open your account, mostly based on your ability to pay and your credit history, and they can raise or lower it later. Going over the limit can bring a fee, but only if you've opted in to over-limit transactions.

What your limit covers

Your limit is the ceiling. Your available credit is what's left under it right now: the limit minus your current balance and any pending charges. With a $1,000 limit, a $300 balance and $50 in pending purchases, your available credit is $650.

Everything that goes on the card counts toward the limit, including interest and fees. An annual fee charged to the card, for example, uses up part of your limit the day it posts.

Many cards also set a lower limit for cash advances. It counts against your main credit limit, so a cash advance cuts into the credit you have left for purchases too. Your statement usually shows both numbers.

How issuers decide your limit

Each issuer uses its own rules and doesn't usually publish them. A few things come up again and again.

• The CARD Act requires issuers to consider your ability to make the payments, based on things like your income or assets and your current debts. If you're under 21, you generally need independent income of your own or a cosigner.
• Your credit reports and scores show how you've handled credit before, such as whether you've paid on time and how much you owe now.
• The type of card matters. With a secured card, the limit is usually tied to the deposit you put down. Cards for people who are new to credit often start with lower limits.

Two people with similar incomes can get different limits on the same card, because issuers weigh these things in their own ways.

How your limit can change

Your limit can move after the account is open. Some issuers review accounts and raise limits on their own, often after a stretch of on-time payments. You can also ask for an increase, usually in your online account or by phone. The issuer may ask for your current income, and some requests lead to a hard credit check, so ask about that before you go ahead.

Issuers can lower a limit too, for example if a card hasn't been used in a long time or your credit reports show new missed payments. If your limit drops, the issuer generally can't charge an over-limit fee or penalty rate for going over the new limit until 45 days after it notifies you.

A lower limit can raise your credit utilization even if your balance stays the same. A $400 balance is 20% of a $2,000 limit but 40% of a $1,000 limit.

What happens if you go over

The CARD Act sets the rules here. An issuer can only charge an over-limit fee if you've opted in, meaning you've agreed to let transactions go through when they'd take you over the limit.

• If you haven't opted in, a purchase that would push you over is usually declined. If the issuer approves it anyway, it can't charge an over-limit fee.
• If you have opted in, the issuer can charge one over-limit fee per billing cycle. It generally can't keep charging that fee for more than three cycles in a row for the same overage.
• You can cancel an opt-in at any time.

Interest and fees can push you over even if you stop using the card. Being at or over the limit also means that card's utilization is at or above 100%, which can weigh on your scores. Some card agreements list going over the limit as a trigger for a penalty APR, so check yours.

The CFPB's credit card pages have more on over-limit fees and your other rights as a cardholder.

What to do next

1. Log in to your card account and note your credit limit, your available credit and any separate cash advance limit.
2. Check whether you've opted in to over-limit transactions. If you don't want them, you can opt out.
3. If your issuer offers balance alerts, set one well below your limit so you know when you're getting close.
4. Check that the limits on your credit reports match your accounts, using your free weekly reports at AnnualCreditReport.com.

This guide is general education, not financial advice. Card rates, fees and approval are set by each issuer, so check the issuer's own terms before you apply.