A credit limit is the maximum amount of money you have been assigned to spend on your credit at any given time, which varies between person to person. Essentially, a credit card is a kind of loan in itself. It gives you the option to borrow up to a pre-determined amount of money each month, capped at your credit limit, but then this must be repaid at the end of each month to avoid interest charges being applied – in other words the money is not yours.
Therefore, a credit limit on a credit card is basically the amount you are able to borrow without incurring a fee.
If you were to go over this limit, you would be essentially borrowing money without permission from your credit card provider, or without having passed any additional checks. If you do go over your limit, you may incur a potential penalty of around £12 on top of what you borrowed which will show up on your next bank statement. Similarly, if you enter into an unplanned overdraft, the fees for borrowing can be pretty hefty and for banks like Lloyds or HSBC, it can cost about £80 to £90 for every £100 over the limit which you borrow.
How Do I Find What My Card’s Credit Limit is?
By signing into your online account, you can find out what your current credit limit is. Similarly, you can speak to your card provider directly over the phone, by email, by post or by walking into your branch. You should also find your credit limit on any paperwork you have received recently. This is information that is always readily available. Credit card companies are required to disclose how much credit you have available, so you know how much you can afford to borrow at any point in time.
What Determines My Credit Limit?
The credit limit you are awarded is assessed by the credit card provider or lender. However, when a card is advertised, it will often display a standard credit limit – this will normally be shown as a guide and is not a guarantee of the amount of credit you will receive. Your personal credit limit comes down to what the provider believes you can afford to repay and is assessed on information like:
- Your income – how much of this you have available to spend each month after bills/rent are paid.
- Your credit history – if you have borrowed before, have never borrowed before
- Other outstanding credit – like mortgage, overdraft, student loan, short term loans or other credit cards. Your lender or provider will consider what percentage of your income these type of debts take up.
- If you have ever been their customer before, they will look at how you used previous accounts.
In looking at your income as well as expenses, the provider or lender can make an assessment of how much you can realistically afford to repay each month without the risk of you falling into financial problems. Reviewing your credit history can tell the lender or provider how well you have paid other forms of credit, and if you have a good track record with your credit – this will ultimately maximise your borrowing amount.
Any other forms of outstanding credit are key to the process too, this is since an individual with lots of credit may be restricted in the amount they can borrow if they have access to so much credit e.g. multiple cards!
Look at it this way:
- Good credit history = higher credit limit, lower rates and fees charged
- Bad credit history = lower credit limit, higher rates and fees charged
How to Increase Your Credit Limit
As the customer, you can reach out to your provider or lender to request a higher credit limit by phone, email or by applying online via your account. In some cases, the upgrade may be awarded instantly if you have held an account with the provider for a few months; in other cases, the company may take a few days to consider your request. Sometimes the increase may be proposed by the card issuer rather than you as the customer – this is actually quite common.
They usually offer this increase based on how well you have been managing your account in the past. However, having a higher credit limit could mean you end up spending beyond your means in which case the provider could decide to decrease your limit instead. To avoid temptation of overspending, you can ask for your credit limit to be lowered to ensure you can maintain the repayments. (Source: MoneyAdviceService)
Other Types of Credit limit
A Secured Credit Card: This is a credit card secured on something tangible like property, jewellry or a vehicle. This type of credit is less common, but it is one option available to get access to finance. The credit limit you are awarded is normally based on the value of your collateral items that can be repossessed by the lender if you cannot repay the amount owed. So, if for example your watch is worth £1,000 and used as collateral to secure the credit card, this is the credit limit you should be awarded to borrow against.
A Prepaid Card: This is a type of card where money must be put on the card before use. The amount of money loaded on to the card is ultimately the maximum amount that can be spent before the card is topped up again. You can put £1,000 onto your prepaid credit card, for example, and as the amount has been prepaid you do not have to repay anything at the end of the month like you would with other credit limits. It is very similar to a pay-as-you-go mobile.
This can be really useful for people who want to go travelling and who only want a certain amount of money to spend. Furthermore, if the card is stolen, it only has a limited amount on it that can be spent (unlike a traditional credit card which is likely to have a higher credit limit). It is also a popular choice with parents to give to their children or teenagers as they have a cap on what they can spend every month or year.
No preset spending limit: Credit cards with no preset spending limit do not have a defined credit limit. This option monitors the customer’s spending patterns and income and adjusts the customer’s credit limit accordingly each month. It is not always possible to be able to predict what your credit limit might be month-to-month which can make it difficult to know how much you are able to spend on that card. It can be a useful way to avoid falling behind with repayments or overspending therefore saving money as these types of card usually require you to pay your balance off in full each month
How Do I Repay My Credit Card?
Credit card balances are commonly paid off by using a debit card which is connected to your bank account or by direct debit. These are the most efficient and common ways to pay and repaying by direct debit will ensure you never forget a payment.
An alternative option is to move the existing debt to a 0% balance transfer credit card. This allows you to move all of your debt for a fee of around 3% of the value, which then allows for an interest free period of several months. This allows you to get back on your feet and repay any debt with more ease as every penny of your repayment goes directly towards reducing your balance during the interest free period. However, make sure this card is not being used for new purchases (otherwise charges may apply) and is only used as a debt consolidation method.
Whilst you can make minimum monthly repayments, as these are set at very low levels it can take years to repay the amount borrowed and could cost thousands of pounds in interest. It is advisable to aim to pay off the entire debt each month; if this is not affordable then you can speak to your provider to work out a repayment plan.
Any type of credit limit should be used responsibly to avoid high interest payments (if the balance is not repaid in full) and additional fees or penalties for exceeding your credit limit or missing a payment.