How big can you make a letter?

Angelina,

As a curiosity, the 1296 pt font size limit was established to fully fill the original size of the Workspace (canvas), of course, what else?

And as Kurt said, you can increase it tenfold (1000%) without the Effect scaling with the large canvas (Workspace) because it is 10 times larger (and coarser, which is undoubtedly of no consequence in this case).

You may create a large canvas document. There you can enlarge live type up to 12960 pt.

Angelina,

You can go past the limit by scaling further up as an Effect, using Effect>Distort & Tansform>Transform by inserting the desired % value in both the Horizontal and Vertical box under Scale to reach the desired size (such as 400% to reach 4 times the font size value in the Character panel).

If you are trying to work with live type at large scale sizes, then yes, it can be enlarged only so big unfortunately. Lettering going past 17 or so inches usually has to be converted to outlines in order to be scaled even larger. If the type has to remain live then the limits force you to work in some ratio of scale. It's not all that difficult to work with lettering after it has been converted to outlines. Sometimes it's a necessary thing if you're doing sign design work. I really like Variable Fonts, but many of them have overlaps built into them. That makes it necessary to convert type objects into outlines and weld over the overlaps using Pathfinder functions. Any tools that do cutting, be it a vinyl cutter/plotter or routing table will cut where ever a path is present. So the overlaps have to be eliminated. Once the type object is just raw vectors it can be scaled to any giant size.