29 Jan What is a Credit Limit and How Does it Work?
A credit limit is the total amount you can spend on your credit card. This amount can fluctuate, depending on things such as the lender, the credit card type, as well as your own previous credit history.
A credit card is a revolving credit facility, and works in a similar way to a loan, as you are able to borrow up to a specified amount each month. This is placed on your card, and then you will be required to pay this amount off plus interest on a monthly basis.
How does a credit limit work?
An example of a credit limit in practice would be:
You are given a credit limit of £1,500 per month, and you have currently put £1,000 on the card. That means if you want to, you can spend up to another £500 on it without having to pay a penalty or incur additional charges alongside interest.
Is a credit limit reusable?
Yes, a bonus for both individuals (and businesses) using a credit card is that the credit limit is reusable. That means providing that you have fully repaid the amount you have spent each month, it will return to zero and you can use the full credit limit amount once again.
What happens if I go over the credit limit?
If you go over the agreed credit limit, you will incur fees and penalties from the credit card provider. It could also harm your credit score in the long-term.
How do I find out my card’s credit limit?
Finding out your credit limit is easy, and you have a number of choices to choose from:
- Signing into your credit card online or via the mobile app
- Asking the credit card provider by email, post or calling them
- Going through recent credit card paperwork.
It is a requirement for credit card companies to be completely transparent about this kind of information, so you are aware of how much you can borrow every month.
What factors determine your credit limit?
Each and every credit card provider has its own set of eligibility criteria. Whilst most cards do advertise a credit limit, this is usually only the standard one and not everyone will receive it.
The credit card limit you may receive can be based on things such as:
- Current employment status
- Level of monthly income
- Credit history
- If you have other types of credit understanding
- Whether you have borrowed money before or not
- If you are an existing customer
This information is used so that the lender can build a picture of what you can realistically afford to pay each month without this putting you into further debt.
Your credit history will be one of the biggest factors determining your credit limit. This is because it your past credit behaviour is a great way for credit card providers to determine your future behaviour.
This means that more or less, a good credit history enables you to access a higher credit limit and also benefit from lower rates.
Meanwhile, a bad credit score will mean a lower credit limit and higher rates charged overall. (See bad credit loans)
How can I increase my credit limit?
It is possible to ask for an increase in your credit limit from your credit provider. This can be done online, email or by phone. However, keep in mind it doesn’t necessarily mean you will receive it.
If you do receive an increase in your credit limit, then the credit card provider may instantaneously increase it, or it may take a few days.
If you are granted a higher credit limit, it will usually be because you have shown that you have managed to successfully pay the current limit each month.
However, keep in mind it can work the other way too. If you fail to keep up with repayments, you may find your credit limit reduced.
How to pay off your credit limit
Most people choose to pay off their credit card balances using their debit card which has been connected to the account.
It is highly recommended to not use another card to pay off an existing credit limit – this can lead to financial difficulty.
However, some may decide to use a balance transfer credit card. For example, if you have a high balance to pay on one card. This enables you to move all existing credit card debt for approximately 3% of the value, paying 0% interest for a number of months.
This may be an option if you are trying to pay off debt without having to pay sky-high levels of interest too.