When we have our credit card burning a hole in our wallet, it can feel that we could buy anything and everything we ever wanted. Just a simple flash of our plastic and the world is our oyster. But, unless you are one of the very select few with an American Express Centurion Card, the chances are that your credit limit restricts your ability to spend.
What is your credit limit?
Your credit limit is the maximum amount of credit that your credit card issuer is willing to offer you at any one time. It is not set over any particular period (as a loan might be), so as long as you stay within your limit, by making regular payments, you can continue to borrow. In this way, someone with a £2,000 credit limit could borrow, over the course of a year, up to £24,000, if they cleared their balance on a monthly basis.
How is your credit limit calculated?
It is a constant bug-bear of credit card applicants that they will not discover what credit limit they will get until after they have applied for a card. However, there are good reasons for this, and much of it is due to a desire to protect people from becoming over-indebted.
Until a credit card issuer has completed a full credit check on you when you apply, they do not have a full picture of your financial situation. Without this they cannot accurately determine what a reasonable credit limit would be.
Of course, many credit card issuers will disclose the minimum credit limit they will offer, and if your financial situation is such that they are unable to provide this, then your application will be rejected outright.
However, assuming you meet the minimum eligibility requirements for a card, various factors are then considered when determining how much credit you should be given. Each credit card issuer will place different weights on the various individual elements, but they will use the following data:
This could be your salary, benefits, annuity income, or another source of personal income. This information shows your card issuer how much money you have to service your existing lifestyle and debt obligations.
Your credit history, which is recorded by the credit reference agencies in your credit report, will demonstrate your credit experience (or lack thereof) and your approach to managing your debts.
Your credit report also contains details of your current credit obligations, including mortgage, loans, and other cards. Using this information, your card issuer can forecast how much of your income is required to service your existing borrowing.
Alongside your current borrowing, your credit card issuer will also want to understand your potential debt liability. For instance, you may owe £100 on a particular credit card, but have a further £4,900 potential exposure, if you had a £5,000 credit limit. You might also have an arranged overdraft that you are not using.
Although your income and behaviour are the most important factors in determining your credit limit, lenders will also look to those you have financial associations with for hints of impending trouble. If, for instance, your partner has missed consecutive payments or has had a significant change in their circumstances noted, a lender might be concerned that you have applied for additional credit to help them - which would probably not be in a lender’s interests.
Can your credit limit change?
Credit limits frequently change, both up and down, in line with your situation. If you have demonstrated a responsible approach to borrowing, there is a chance that your lender will voluntarily offer you additional credit. Of course, you can always reject their offers.
If you think you need an increased credit limit, which you have not yet been offered, you could approach your card issuer directly. They will then reassess your current credit limit. However, you should bear in mind that in certain circumstances your limit could go down as well as up if you prompt them to reassess.
Equally, if your circumstances change, e.g. you display poor credit management skills, or if your lender needs to reduce their debt exposure for other reasons, they could well reduce your credit limit. Often this is done with little notification (especially if your circumstances change dramatically), so be sure not to use your credit card for long-term borrowing, as you may need to repay it far sooner than you expect.
What happens if you exceed your credit limit?
The response to exceeding your credit limit differs by credit card issuer (and sometimes by customer) but is likely to include one or more of the following measures.
- Charging a fee for exceeding your limit
- Removing access to any preferential promotional rates (i.e. 0% balance transfers)
- Reducing your credit limit
- Increasing your interest (APR)
In addition to these measures, your credit card issuer will record the event in your credit report(s), which could in turn affect how other current (and future) lenders treat you. It may even impact the treatment of those you are financially associated with.
If possible, you should avoid going over your credit limit. Many issuers offer free text alerts to help you track your balance, which can be very useful.
You should also remember, especially if you fail to clear your full balance every month, that interest charges will be added to your balance, so you may have less scope to spend than you thought.
What to do if you exceed your credit limit?
If you notice that you have exceeded your credit limit before your card issuer communicates with you, you should contact them immediately. Actively managing the situation shows your card issuer that you understand that breaching your limit is very serious, and they may be able to take an immediate payment to remedy the situation and make notes on your account to explain any extenuating circumstances (i.e. you needed urgent medical care abroad). This does not mean that you will necessarily escape any repercussions, but you are more likely to be able to avoid them.
If you fail to notice that you have exceeded your limit, your issuer will follow a predefined process which will probably result in one or more of the steps detailed above being undertaken. Of course, if you feel that there are mitigating circumstances, you are at liberty to discuss these with your lender, and then it will be at their discretion to decide whether to alter any or all of the sanctions that they have imposed.
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