Credit card limits: How do they work?

Is your credit card limit too high or too low? Keeping an eye on your credit card limit could mean that you avoid fees for exceeding it and don’t risk damaging your credit score. 

It’s essential that you understand what your credit card limit is so that you know what the maximum amount is that you can borrow. This will help to prevent you exceeding your credit limit and damaging your credit score. You also need to know what you can do if your credit card provider increases your credit limit, or if you would like to increase your credit limit. Here we explain how credit card limits work and why they are so important.

What are credit card limits? How are they calculated

Before you make an application for a new credit card, you won’t know what the credit limit will be if you are accepted for that card. Some credit cards will tell you what the minimum and maximum credit limits are on the card. However, it is only after you have applied for the credit card and have been accepted when you will find out what the credit limit actually is. 

The credit card company decides the maximum amount of money you can borrow. This credit limit could be as low as a few hundred pounds for people with bad credit, or thousands of pounds depending on the credit card and how creditworthy you are. 

The average credit limit on credit cards is between £2,500 and £4,000, and how much you are given will depend on your credit score. Your credit limit is decided upon based on the following details in your application:

  • Your income

  • How long you have had your bank account

  • How long you have been with your current employer

  • Information from a credit reference agency

Finally, it checks your identity and confirms where you have lived over the last few years, as well as identifying any outstanding loans or credit card balances on your credit file. The credit card company uses all the information in your application combined with the information from the credit reference agency to decide how high your credit limit should be.

If you have asked to transfer a debt from another credit card to your new credit card, the credit card company may see if it can give you a high enough credit limit to allow this balance transfer to take place. 

During the application, you may also be asked what credit limit you would like on your new card. The provider will then see if it is possible to give you the credit limit you requested. 

If the credit limit you are given is not high enough when you are accepted for your new credit card, you can ask for your credit limit to be increased. However, you are probably more likely to get a higher credit limit if you wait for 3 to 6 months of having your new credit card.

How to use your credit card effectively

It is never a good idea to spend more than your credit card limit as you will be charged a typical fee of £12, and your credit score will be reduced. As a result, you should keep an eye on the balance on your credit card and not let the balance outstanding get too close to your credit limit. 

If you already have outstanding credit card debts, you need a high enough credit limit to transfer your debt using a 0% balance transfer credit card. This way, you can take advantage of paying no interest on your outstanding balance for up to around 26 months. 

Can you increase your credit card limit?

Once you have had your credit card and managed it well for 3 to 6 months, you could ask your credit card company if it will increase your credit limit. The credit card company will check your credit file to make sure that you are still creditworthy and can afford to borrow up to the increased credit limit.

Of course, if you borrow money on a credit card, you will usually be charged interest. Standard interest rates on credit card purchases are around 21%, so it can be an expensive way to borrow. If you have a credit card with an introductory 0% deal on new purchases, you won’t be charged interest for a period of time - up to around 26 months or more. If you do not clear the debt on your credit card before the 0% period ends, you will have to pay interest at the card’s standard interest rate. 

If you are in financial difficulties, credit card companies are not allowed to increase your credit limit, even if you ask them to. 

Is a higher or lower credit limit better for you?

As we have established, how much credit you need will depend on your spending habits, or whether you want to do a balance transfer. Having a credit limit that is too low could mean that you are more likely to go over your credit limit, which will incur charges and damage your credit rating. 

However, it can be risky having a credit limit that is too high, as it could put you at risk of fraud. Also, you may be tempted to borrow more money than you can afford if the credit is available on your credit card.

Managing unsolicited credit limit increases

Once you have had your credit card and used it correctly for at least 3 or 6 months, your credit card company may offer to increase your credit limit. You have 30 days to decide if you want to accept the credit limit increase. If you do nothing, your credit limit will be increased. If you would prefer that your credit card limit is never increased by your credit card company, you need to tell them not to increase it.  

You may also decide that you need a lower credit card limit. Bear in mind that reducing your credit limit could mean that your credit score is reduced.

Should you increase or decrease your credit limit?

Before asking your credit card company to increase or decrease your credit card limit, you need to understand what the implications could be. Here we explain the pros and cons of increasing or decreasing your credit card limit.

Pros of increasing your credit limit

  • You can borrow more money on your credit card

  • You are less likely to go over your credit limit and incur charges 

  • Having a large amount of unused credit on more than one credit card could help improve your credit score 

Cons of increasing your credit limit

  • You may be tempted to spend more than you can afford with your credit card and the amount you owe could increase

  • Having too much available credit compared to your income could make it less likely that you will be accepted for a new credit card

  • A larger credit limit is a security risk. It could mean a fraudster could spend more on your card if they get hold of your credit card details. You should get your money back if you are the victim of fraud 

  • Owing too much money on credit cards, loans or an overdraft could make it more difficult for you to be accepted for a mortgage as lenders will assess the affordability of the mortgage by looking at your existing debts

  • Needing to borrow more on your credit card could be a sign that you are struggling to manage your finances and borrowing more money may not be the best solution

Pros of decreasing your credit limit

  • A lower limit could remove some of the temptation to use more than you can afford

  • It could prove easier to be accepted for another credit card, for example, if you are looking to move money from one credit card to another to reduce the interest you are paying

  • A fraudster can spend less money if your card is lost or stolen, or if they obtain your card details

Cons of decreasing your credit limit

  • A lower credit limit could increase the chance that you go over your credit limit by spending too much on your credit card

  • Your credit score could be reduced if the amount you owe on your credit card is too close to your credit limit on your credit card

What do if you are in financial difficulty

Exceeding your credit card limit, having your credit limit reduced, needing to increase your credit card limit or being turned down for a new credit card could all be signs that you are struggling financially. If you spend more than your credit limit or are only able to repay the minimum repayment when you get your credit card bill, you should get some free debt advice. See contact details below.

Contact details for debt advice service:

Citizens Advice - and 03444 111 444

National Debtline - and 0808 808 4000

Stepchange - and 0800 138 1111

12th June 2020