What’s one of the most important things to understand about your credit card? Your credit limit. Exceeding your limit can have a significant impact on your credit score and the cost of your borrowing. So understanding what it is, how it is decided and how to increase it is key.
What is a credit limit?
Simply put, your credit limit is the maximum amount that you are able to spend on your credit card. For example, if you have a credit limit of £1,500 and you spend £500 of that limit, the remaining amount available for you to spend is £1,000. You should be informed of your credit limit when you receive your introduction letter. However, you can also check your limit by logging on to your account or calling your provider.
How is a credit limit decided?
There are several factors that providers consider when setting your credit limit. As you will see on most card applications, credit limits are ‘subject to status’. This means that they will be decided based on your personal circumstances.
Most providers conduct a credit search based on your application. This looks at areas such as any outstanding debts you owe, whether you have missed any repayments, your annual income, what credit you have available to use and for how long you have held your accounts. All of this contributes towards the decision of how much to lend you.
What if my limit is too low?
Don’t panic if you receive your card and think your credit limit is too low. There are ways to increase your credit limit, although it won’t be instantaneous. Most card providers require you to wait between three and six months before making a credit limit increase request.
If you are looking to make a request, then consider whether you have shown good credit behaviour over the period for which you have had your card. A provider will be more likely to increase your limit if you have kept within your existing limit and not missed any payments. Also consider whether anything in your personal circumstances has changed. For example, inform the provider if you have received a pay rise, then your increased income may be factored into any credit increase.
What happens if I exceed my limit?
Spending over your credit limit can have financial repercussions. In the first instance you will be fined. How much this is can be found in your credit card’s terms and conditions, but is typically around £12. Your provider may also reduce your existing credit limit.
It is likely that your account will also be frozen until your balance comes back down to beneath your credit limit. Also, you run the risk of losing any 0% introductory offers you may have on purchases or balance transfers. This would mean that rather than purchases/balance transfers being interest free, your balance will then be charged at the card’s standard interest rate, which is typically around 18%.
Finally, the biggest risk you run when exceeding your limit is leaving a black mark on your credit report. This means that you could struggle to be approved for credit in the future, as it demonstrates that you have not previously displayed good borrowing practices and that you represent a risk to lenders.
Verdict
Credit cards can be a useful financial tool, but understanding how they operate is key. Understanding your credit limit and respecting it can lead to a good credit score and a positive financial outlook. Getting it wrong can lead to marks on your credit report, withdrawal of offers and reduced credit limits. So it is best to be financially savvy and make sure you know your credit limit before you start using your card.
