Your Credit Limit

Your credit limit is the maximum amount of money you can borrow on a credit card. It is normally determined by the lender, who uses your credit report and information on your credit application to set the limit.

There are certain things that your credit limit can affect, depending on how you manage it – learn more on the best practices for managing your credit limit.

A Quick Summary of credit limits

• Your credit card provider sets your credit limit when you open your account, based on your credit score and personal financial circumstances.
• Using your card reduces your available credit, while making repayments restores it.
• Always aim to stay well within your credit limit - overspending could harm your credit score and lead to declined transactions.

What is the credit limit on a credit card?

Your credit limit tells you how much you’re allowed to borrow. It will work something like:

Get credit

When you’re approved for a credit card, your provider sets a credit limit - for example £1,000. This is the total amount you can borrow. Your credit limit is based on factors like your credit score and income and may be reviewed or adjusted over time.

Use credit

Whenever you make purchases, your available credit decreases. For example, if your credit limit is £1,000 and you spend £300 on car repairs, your available credit drops to £700. Keeping track of your spending is important to avoid reaching your limit.

Pay the balance

When you make a repayment, your available credit increases by the same amount, (minus any interest charged). Regular repayments not only restore your available credit but also help maintain a good credit score.

How is my credit card limit calculated?

When you apply for a credit card, your provider determines your credit limit based on several factors:

• Your credit score: A higher score usually results in a higher credit limit, as it shows lenders that you’re financially responsible
• Your income and expenditure: Providers consider your income and expenditure to ensure the credit limit aligns with your ability to repay
• Your credit history: If you have a history of borrowing responsibly, you’re more likely to receive a higher limit
• Information from your application: This includes details about your employment, existing debts, and financial obligations

Your credit limit isn’t fixed and may change over time as your circumstances or credit score improve.

How much of my credit limit should I use?

Using too much of your credit limit can lower your credit score, even if you pay on time. Lenders like to see that you can borrow responsibly without relying heavily on credit.

As a general rule, try not to use more than 25% of your credit limit. For instance, if your credit limit is £2,000, try to keep your balance below £500 while making repayments on time each month. By keeping your credit utilisation below 25%,it may indicate to lenders that you are comfortable managing your finances .

If you often use a large percentage of your limit, try spending less or requesting a higher limit - but only if you’re confident you can manage it responsibly. Only borrow what you can comfortably afford to repay.

How can I increase my credit limit?

Credit card providers offer two main ways to increase your credit limit. 

Request a manual increase

If you feel you need more credit, you can contact your provider directly to request an increase. They’ll assess your financial situation before approving or denying your request.

Automatic increases

Some providers offer automatic reviews of your account to decide if an increase is suitable. You can opt into these reviews to avoid the hassle of making a manual request.

Should I increase my credit card limit?

Increasing your credit card limit can be helpful in certain situations, but it’s not always the right decision. A higher limit can give you more flexibility for large purchases or emergencies and may even help improve your credit score.

However, it also comes with risks, so it’s important to weigh the pros and cons carefully before making a decision.

Advantages of increasing your credit limit

• Improved credit score: A higher limit lowers your credit utilisation ratio, which can boost your credit score and improve your chances of getting future credit, potentially at a lower interest rate. 
• More financial flexibility: Extra credit gives you more spending power for large purchases or emergencies.

Disadvantages of increasing your credit limit

• Potential for more debt: Extra credit can lead to overspending, higher balances, and increased interest costs.
• Perceived risk by lenders: Lenders may see a high limit as risky, making it harder to secure future credit.
• Temporary drop in credit score: Frequent requests for increases can temporarily lower your credit score as lenders may do a hard search on your credit file before making any decision.

Can I reduce my credit card limit?

Yes, most providers allow you to lower your credit limit. This can help control spending but you need to be aware of the impact this can have on your credit utilisation ratio.

For example, if you owe £500 on a card with a £1,000 limit, your utilisation is 50%. Reducing your limit to £600 would raise your utilisation to 83%, potentially affecting your credit score.

If you decide a lower limit is right for you, contact your provider and monitor your utilisation to keep it below 25% for a healthier credit profile.

Why your credit limit matters

Credit can be a useful and essential part of the modern financial world, and your credit limit can be an important factor in demonstrating how responsible you are with credit.

Being sensible with your spending may help increase your credit limit and help improve your credit score, which in turn, could help in future financial matters, such as applying for a loan or mortgage.

Take a look at your Equifax Credit Report & Score, which is free for 30 days and £14.95 a month thereafter, to learn more about your credit history.