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How Does A Credit Limit Work?

Many of us use credit cards, in fact as of March 2016, well over 60 million credit cards were in issue, relating to roughly 50 million accounts, whilst there were over 223 million credit card purchases for the same period of time, at a value of £12.6 billion.

Each and every credit card has a limit on how much you can spend without incurring fees. We tell you all the details that are essential to know if you are considering getting a credit card, and why it is important to keep within the credit limit.

With a guarantor loan, you do not have a credit limit, simply the amount you have asked to borrow and you know clearly how much you will be repaying each month. The same applies for personal loans, secured loans and mortgages too. Credit cards are based on revolving credit, hence the role of a limit comes into place, as we explain below.

What is a credit card limit?

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In certain respects, a credit card limit works in a similar way to a loan.

When you have made an application for a credit card and it has been accepted, your provider will tell you the credit limit. This is the total amount you can spend on this card at any given time. Depending on your personal circumstances, this amount can differ. A credit limit allows you to spend an agreed amount of money each month that is then repaid at the end of the month to avoid incurring interest charges. You may also be prevented from being able to spend money on this account until you have paid the current balance.

 

How much will I pay if I go over my credit card limit?

This depends on your provider, but you may incur a penalty of around £12 on top of what you have borrowed on the credit card. Even worse, if you end up with an unplanned overdraft, fees can end up becoming considerably expensive. For example, some banks will charge £80 for each £100 that is over the credit limit. So pay attention and avoid unplanned overdrafts and having to be forced into taking out short term loans online if possible.

Will my provider warn if I have gone over my credit limit?

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Make sure you keep within your credit card limit as you can incur high fees for not doing so.

It is not necessarily the case that your provider will stop you going over the credit limit. Transactions can still go through even if you have gone over the agreed credit limit.

What factors decide what my credit limit will be?

When a card is advertised, it may state a credit limit, however, do not take this as a guarantee that this will be the agreed amount for you. Generally speaking, this credit limit is just given as an overall guide. Above all, there will be certain assessments made that will determine how much you will be offered, based on how much they believe you can pay.

Information that your provider will consider include:

  • Any outstanding credit – this includes student loans, overdrafts, mortgages, short-term loans or other credit cards. Depending on these, your provider will add up how much of your income is spent on debts. This can be a very important factor as if you have many credit cards it will be likely you will have the chance of gaining more credit.
  • Whether you have been a previous customer, and how you used the accounts you previously had with the provider.
  • Employment can be an important factor that indicates what credit limit you will end up having.
  • Your income and how much is left after paying for essentials such as the bills and rent.
  • Affordability and how much you can afford to pay each month without incurring financial difficulties.
  • Any expenses that you have
  • Your credit history – it could be worth taking out a free trial with a credit report company to check your history before applying for a card. Providers will look at this information in order to see if you have a good track record, and how well you’ve paid for other types of credit too.

Can I increase my credit limit?

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You can request a higher credit limit which may be accepted. It is also fairly common for lenders to suggest a credit limit increase too.

 

It is possible that you can potentially increase your credit limit. You may be able to do this by contacting them and make a request by phone, applying online through your existing account, or by email.

You may find that your request for a higher credit limit is accepted instantly if you have been with the provider for a certain amount of a time, however, do not expect this to be an absolute guarantee. Other lenders or providers may take a few days to make a decision over increasing the limit.

In other cases, you might find that the credit increase is suggested by the company itself, which isn’t as uncommon for lenders to do as you might initially think.

How do I repay my credit card limit?

You have a few different options to choose from. For many people, paying off their balance using a debit card or by a direct debit connected to their account is the simplest and efficient way to do it. Setting up a direct debit can be particularly useful if you are extremely busy, as repaying using this method means you won’t forget paying back your credit limit.

But paying using a debit card or direct debit isn’t the only option you have. You could also choose to move the existing debt to a 0%  balance transfer credit card.

What is a 0% balance transfer credit card?

If you choose this option, you move your debt to this card for around 3% of the value, and you receive an interest-free period for roughly several months, giving you extra time to pay back the debt you may have been struggling with.

Use a 0% balance transfer credit card with caution

However, you should make sure this balance transfer credit card isn’t used for any new purchases as you could be subject to charges. It is also advised that you pay the amount borrowed each and every month as the minimum monthly repayments can be at very low levels. This means it could take a considerable amount of time to pay off, and you have to pay interest which could be thousands of pounds.

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