Too much credit? How inequality extends to credit limits

Some people have a way higher credit limit than they need, while others who could use it do not. This can exacerbate financial inequality.

I applied for a new credit card recently, as it offered some nice travel benefits while mostly being left in a drawer. (I do use credit cards occasionally, just not for everyday spend.)

When I looked at the card information, I noticed something interesting: the credit limit I was given was $21,600.

Why in the world was I given so much?

I never max out a credit card; I barely use them. There is one credit card that I use so infrequently that I only use it when I get a letter stating that they’ll cancel it if I don’t do something with it. (I keep it because it’s my oldest card and it’s no annual fee.)

Because I use credit cards so sparingly, I’ve never really looked at how much credit I had. But over $20k? That seemed like a lot.

So I went through my small stash of credit cards, and summed up the credit limits. And what I found shocked me, not just because of the number, but because of what that implies for everyone else.

Read on if you want to hear what that number is.

Credit limits

The average credit limit for Americans in 2023 was roughly $30,000.

That’s a lot of money. And you could pay a lot of interest too. If I went and charged $30,000, assuming an 18% APR, I’d owe about $450 per month in interest alone. That’s $5,400 a year just on the interest, before I’d start paying back principal.

I don’t need $30,000, and I certainly don’t need to put it on a credit card. Hopefully, you don’t either.

The irony of credit limits

Generally speaking, the higher your credit score, or the higher your credit worthiness (however banks decide this), the higher your credit limit is going to be.

I find a certain amount of irony in this. If you’re deemed “better at credit”, it seems like you would be less likely to need all that credit, because you can theoretically manage it better!

Meanwhile, those with less “credit worthiness” are going to have a lower credit limit. And it’s those people who might be more likely to hit their limit.

So it does seem like banks are giving more credit to those who likely don’t need it, and less to those who might.

The structural inequality of credit limits

But it gets a little worse. One of the primary components of one’s credit score is credit utilization. Banks want you to use credit (so they get paid), but they don’t want you to use too much credit. I guess this is because they think you’re less likely to pay it all back.

So a higher credit utilization ratio (credit used vs. credit limit) is deemed “bad” and will result in a lower credit score.

Do you see the problem here? People are given low credit limits because they are seen as being less reliable borrowers, but this leads to them utilizing more credit as a percentage of their credit limit, which in turns tells the bank that they are less creditworthy.

In short, those with less than stellar credit are handicapped from improving their credit ratings, while those with good credit are given so much credit that their utilization is more likely to be seen as positive.

Sidebar: Could you ask for a higher credit limit?

In theory, if you didn’t have a high credit limit, you could always call up your credit card servicer and ask for an increase, which if approved would lower your utilization ratio. But that could be dangerous if you’re already carrying a balance and likely to use more of your credit.

I’d much rather you focus on paying down your balance, and then you won’t need more credit. More isn’t always better.

The absurdity of having good credit

Even though I don’t worry about my credit score and urge all my clients to do the same, my credit score has continued to grow. This is why I tell people not to worry about it; if you do things right, your score will fix itself.

(But if you want to check your credit score, just for interest, here’s how.)

Anyway, I dug all of my credit cards out and looked up my credit limits for all of them, and then summed them up.

Because of this, I can now tell you that I have a grand total credit limit of: $155,800.

Yes, I have over $150k in credit limit. That’s absurd.

I could pay off my mortgage with that. I could buy a couple of brand new cars with that.

But I won’t, and that’s the irony right there. They’ve given this to me, and they know I won’t use it. Meanwhile, they’re subtly punishing those without all that credit, making it less likely that their situation will improve.

Even though I don’t think much of credit scores, I can still see how unfair that is.