What is a credit limit?

What is a credit limit?

A credit limit is the maximum amount of money that you have been permitted to spend on your credit card.  A credit card works essentially like a type of loan which proves you the option to borrow a certain amount each month and then repay at the end of the month. A credit limit is, therefore, the barrier for how much money you are allowed to borrow. If we think of it like this: If Lucie has a credit card with a credit limit of £3000, if she has spent £2500, she has £500 to go until she has reached her credit limit. If she exceeds her credit limit she will be forced to pay either a penalty or certain extra charges.  Your credit limit renews itself each month when you have paid your credit card bill. When you exceed this limit you are essentially borrowing from the person who has authorised your credit card without permission or without having passed any potentially required security checks. You are therefore liable to receive a £12 extra charge which will be seen on your bank statement. Furthermore, if you exceed your overdraft you are liable for a charge such as £80 or £100 for overtime that you borrow.

What is my credit card limit?

You will be able to find out what your credit card limit is by either logging into your online banking account, calling your bank or looking at recent paperwork they have issued you. The company that has provided you with your credit card is required to be completely honest and open about how much you are allowed and can afford to borrow each month. 

What factors affect my credit limit?

credit-limit

You should always take measures to ensure you are spending wisely.

Different people dependent on various factors are more financially secure than others, therefore the card provider or lender will assess every individual to formulate a credit limit that is suitable for them. If you find that you are declined for a credit card application, you still may be accepted for a payday loan. A standard credit limit is just a guide and will be actively affected by a number of factors, listed below.
  • Income: How much are you earning and are you earning a set amount each month, and how much money do you have to spend each month once bills have been paid
  • Debts: Do you face the pressure of payments such as a mortgage, various overdrafts, loans or additional credits.
  • First time: If you have never borrowed before the provider will not have any authority on how you hand repayments and credit. If you have been in a situation such as this before, it might be useful to retrieve a document which attests to your financial behaviour.
  • Previous customer: If you have been a customer before, they will be able to access your accounts to monitor your financial behaviour
  • Options: It is important to keep in mind that there may be options open to you which are far more suited than a credit card
When all of these factors have been evaluated the company will then determine how much you are capable of repaying each month without finding yourself in financial difficulty. If you have shaved well financially in the past your chances of receiving a good credit limit are better.

Good credit history: higher credit limit, lower rates and fees charged

Bad credit history: lower credit limit, higher rates and fees charged

You are allowed to call your credit card company to extend your credit limit to whatever amount you want but this is inadvisable as you could easily find yourself in financial trouble. 

Credit Score

Your credit score is vital if you want to act freely financially and be allowed to borrow when you need. One of the biggest factors which contribute to this is the regular payment of your credit card bills in full. You must never allow it to exceed or go into arrears.

Credit Utilisation

credit-utilisation

It is recommended to keep with 30% of your credit limit.

Credit utilisation measures the amount of your credit limit which is being used and this contributes towards 30% of your credit score. The higher your credit card balance in proportion, not your credit limit, the higher your credit utilisation and the more your credit score is hurt. Its best to keep your credit card balances within 10% – 30% of your credit limit to achieve the optimum credit score.

How do I pay my credit card?

You will typically pay your credit card balance using your debit card which is associated with another account, this is a far more efficient way to do things instead of using another credit card. This has the potential to lead to grave financial problems. Most credit card providers will typically provide you with a free zero interest period for up to 90 days or longer if you make your repayments each month. You can make a minimum monthly repayment as low as 2% of the outstanding debt, but it means that the debts keep increasing and will be charged at the standard credit card rate of 18% or the bad red rate or 30%, though this applies slightly differently in the United States.

Daniel is a loans expert based in London and has been working in the payday loans industry since 2010.