What is a Credit Limit For Credit Cards?

Posted byDaniel Tannenbaum | Category Blog | Date 23 August 2017

A credit limit is the maximum amount you have been assigned to spend on your credit card. A credit card is essentially a type of loan, giving you the option to borrow a certain amount each month and put it on your plastic card and then repay at the end of each month.

A credit limit is pretty much the amount you are able to borrow or your borrowing facility.

For example:

Daniel has a credit limit of £2,000 per month and has currently put £1,500 on your credit card so far. This means he has another £500 he can put on his credit card without receiving a penalty or paying extra charges.

The credit limit is reusable. Once repaid every month, it goes back to zero and you can start again.

When you go over this limit, you are basically borrowing from the credit card provider without their permission or having passed any checks. Therefore, there can be a penalty of around £12 which will show up on your next bank statement. Similarly, if you are entering your unplanned overdraft, the fees for borrowing can be enormous and for banks like Lloyds or HSBC cards, it can cost around £80 or £90 for every £100 your borrow.

How To Find Your Card’s Credit Limit

You can find what your current credit card limit is by signing into your online account, calling up your card issuer or looking at recent paperwork you have received. This is information that is always readily available. Card companies must be transparent so you should know how much you can afford to borrow each month.

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What Determines Your Credit Limit?

Your credit limit is assessed by the credit card provider or lender. Although when a card is advertised, it will offer a standard credit limit, this usually just as a guide and it comes down largely to what you can afford and bases the amount on things like:

  • Income
  • Expenses
  • Affordability
  • Employment
  • Credit history
  • Other outstanding credit

credit-limit-factors

By reviewing your income and expenses, the lender gets an idea of how much you can realistically afford to repay each month without falling into financial difficulty. Looking at your credit history can tell how well you have paid other forms of credit in the past and if you have a good track record, this will maximise your borrowing facility.

Any other outstanding credit is key too – since an individual with lots of credit cards is going to be restricted on the amount they can borrow when they have access to so many cards.

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

You as the customer can request a higher credit limit by simply reaching out to your provider by phone, email or applying online. Sometimes the upgrade will be instant or in some cases, the company will take a few days to consider it. The increase may not always come from the customer as it is very common for the card issuer to contact you and offer you an increase in credit limit. Basing their decision on well you have been paying in the past. Although they could also decide to decrease your limit too if you are struggling to keep up with repayments. (Source: Money Advice Service)

Other Types of Credit Limit

Secured Credit Card: This is a credit card secured on something tangible like a property, watch or vehicle. Although less common, it is one option to get access to finance. Your credit limit is typically based on the value of your collateral that can be repossessed by the lender to recover their costs if you cannot make repayment. So if your vehicle is worth £3,000 and used to secure the credit card, that is the credit limit you will get each month.

Prepaid Card: This is a credit limit where the money is put on the card before and it is the maximum amount that can be spent and cannot be reused. For example, you can load £1,000 onto your prepaid credit card and the amount has been prepaid – so you do not have to repay anything afterwards.

This is commonly used by people going travelling who want only a certain amount to spend and if they risk their card being stolen, well, it only has a limited amount on it (unlike a credit card). It is also popular for 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: This option does not have a fixed credit limit but instead monitors the customer’s spending patterns and income and adjusts their credit limit each month accordingly. It is hard to predict what your credit limit might be month-on-month, but for the very least, it can be a useful way to avoid going into arrears or overspending.

Managing Your Credit Score

Your credit score is essential to your financial freedom, to be able to borrow finance and credit when you need. So to maintain a high and healthy credit score, the number 1 thing you can do is repay your credit cards on time every month. You will have the option of paying in full or a minimum monthly repayment. You should pay either, but never allow for it to go into arrears or over the limit.

Credit utilization measures the amount of your credit limit that’s being used and counts 30% of your credit score. The higher your credit card balance, relative to your credit limit, the higher your credit utilization and the more your credit score is hurt. It’s best to keep your credit card balances within 10% to 30% of your credit limit to achieve the best credit score.

How To Repay Your Credit Card

Credit card balances are typically paid using your debit card which is connected to the account. This is an efficient way to pay, rather than using a credit card to pay off another credit card – which is basically using debt to pay off other debt. This can only lead to more financial woes.

Another option though if you have a lot of credit card is to move it to a balance transfer credit card. This allows you to move all of your debt for around 3% of the value, but then pay 0% interest for a period of several months. This can allow you to get back on your feet and repay any debt. However, this card should not be used for new purchases, only as a debt consolidation method.

When it comes to credit cards, most providers give you a free zero interest period for up to 90 days or longer, if you make your full monthly repayment each month. You can make a minimum monthly repayment which can be as low as 2% of the outstanding debt, but it means that the debts keeps ramping up and ramping up and will be charged at the standard credit card rate or around 18% (good credit) and 30% (bad credit).