What is a credit limit?
A credit limit refers to the maximum amount of credit available to the cardholder on a single card each month. The credit limit is assigned by the credit card company and calculated based on your personal circumstances. This is essentially your spending limit for each month e.g £2,000, £4,000. If you achieve to spend over that monthly credit limit, you will go into your overdraft where especially high interest rates apply.
When applying for a new credit card it is impossible to know the credit limit the card company will give you as the amount displayed usually represents the maximum amount of credit available for new customers, not the actual amount that you will be given. Consequently, many new cardholders are disappointed when they receive lower credit limits then they may have been expecting.
What determines your credit limit?
There are many factors that credit providers look at when setting a credit limit. The most significant factor is your credit score, which contains information on your credit history. This includes information on whether you have met past payments in full and on time, your current debt levels and the amount of outstanding credit available to you. Lenders use this information to assess the likelihood of you meeting all future payments. Those individuals with a good credit history are likely to have access to a higher credit limit because they are less risk of default. By comparison, those customers with poor credit are less likely to have a high credit limit because they are seen as a higher risk of default.
Your level of income is also looked at when setting a credit limit as higher income usually means that you will be able to meet higher payments. It would be wrong to give a monthly credit limit of £10,000 to a person on a low income as this would encourage high spending and the customer will not be able to cope with the repayment. The credit limit is calculated so that it is an affordable amount relative to the individual’s income.
Credit card providers look out for ‘card tarts’, people who try to play the system and repeatedly transfer debt between different cards to gain from incentives set by various lending institutions. ‘Card tarting’ can significantly lower your credit limit, as card companies prefer to reward loyal customers. For this reason, being a repeat customer may make you eligible for a higher credit limit as card providers see you as less risk.
How to increase your credit limit
If you are given a credit limit that is lower then what you expected there are several things you can do to try to get the card company to raise your credit limit. The most obvious way to increase your credit limit is to simply ask the bank or credit card provider.
The most likely way to up your credit limit is to prove that you are a reliable customer. If you can demonstrate to the card provider that you regularly make payments on time, this will be positive for your credit score and the issuer will feel more confident increasing your limit. In fact, most credit card providers have an initial review period of 3 to 6 months before they decide to increase your credit limit.
An additional way to increase the total amount of credit available to you is to reduce the amount of credit used. The ‘Credit Utilisation Rate’ is the ratio between the amount of credit actually used to the total amount of credit available to you accounts for around 30% of total credit score. If possible you should aim for a credit utilisation rate of between 10% and 30% to show that you are not spending beyond your means. This will show that you are not stretched financially and will be able to apply for a higher credit limit if need be.
Use credit limits responsibly
Before asking for an increase in credit limits it is important to recognise the negative consequences a higher credit limit may cause borrowers. Not only might a higher credit limit encourage irresponsible levels of spending it can also damage your overall personal credit score. This is because increasing the amount of credit facilities available to you may increase the chance of you not being able to afford future repayments on new cards.