What is a credit limit and how are they calculated?
Knowing your credit limit can save you from expensive mistakes when it comes to credit card spending
Key takeaways
Credit limits are determined by the issuer based on income, debts, credit history, existing limits, and customer relationship
Be sure to monitor your spending and set up a direct debit to clear your debt each month
A credit limit is a crucial aspect of credit card management, influencing financial flexibility and credit score
What is a credit limit?
A credit limit is the maximum balance you can borrow on a credit card at any given time. It is a cap set by the credit card issuer, based on various factors unique to each individual.
This limit is set for communicated to you when you open your account and can be found on your monthly credit card statements, app or website.
How is my credit limit calculated?
Credit card issuers take into account several factors when determining your credit limit:
Income and financial situation: Your ability to repay is key, so issuers look at your income and other financial obligations, such as your monthly outgoings
Existing debts: If you already have significant debt, this may affect your credit limit
Credit history: A good track record of managing credit responsibly helps
Current credit limits: Existing limits you have on other credit cards may influence a new credit limit
Customer relationship length: Long-standing customers may receive higher limits because they have built up trust with the provider
The card type: Some products, such as balance transfer credit cards, come with higher credit limits to give you space to move debt, whereas specialist credit cards for those with bad credit have lower limits to reflect your higher borrowing risk
How card types impact credit limits
Card Type | Average Credit Limit |
|---|---|
Balance transfer | £2000* |
0% interest (purchase) | £2000* |
Credit building | £500* |
Rewards and cashback | £2500* |
Spending abroad | £2000* |
Maintaining a good credit score by following our tips to improve your credit rating is beneficial before applying for a new credit card.
How to increase your credit limit
To increase your credit limit, you can:
Contact your credit provider and request an increase.
Apply for a new card that offers a higher limit.
Maintain good credit habits, such as paying bills on time.
Avoid requesting frequent credit limit increases.
Keep your card for a longer period to show stability.
Ensure you do not miss any payments.
Providers periodically assess your credit card status to decide the amount of credit they will grant.
This differs from provider to provider and you do not have to accept a higher limit if you believe it might make it too tempting to overspend.
Remember, a higher credit limit should not encourage overspending but rather serve as a financial safety net.
What happens if I go over my credit limit?
Exceeding your credit limit can lead to several negative outcomes:
Declined transactions when you attempt to make purchases
Fees charged by the credit card issuer for exceeding the limit
A potential drop in your credit score
A possible reduction in your credit limit or even account closure if overspending is a recurrent issue
How can I avoid exceeding my limit?
To steer clear of going over your limit, consider the following tips:
Regularly monitor your credit card balance and spending.
Set up a direct debit to clear your credit card debt every month.
Sign up for text and email alerts from your credit card issuer to keep track of your spending and balance.
Should I get a higher credit limit?
There are advantages and disadvantages to having a high credit limit, as follows.
Pros:
Greater financial flexibility and the ability to handle emergencies or make large purchases.
Lower credit utilization ratio, which can positively affect your credit score.
More opportunities to earn rewards, such as points, cashback, or miles on rewards credit cards.
Cons:
The temptation to spend beyond your means, leading to debt.
Increased risk of facing high-interest payments if balances are not paid in full.
Potential impact on future credit availability, as lenders may be cautious of high existing limits.
What is a good credit limit?
A good credit limit is subjective and depends on your financial situation.
Generally, spending 25% to 50% of your credit limit is considered favourable, as it keeps your credit utilisation low.
For example, if you spend £500 a month on your credit card and pay it off in full, a credit limit of £2,000 could be considered a good amount.
Low credit utilisation suggests you are not straining your finances and can have a beneficial effect on your credit score.
This is a positive indicator to credit bureaus and can help maintain or improve your credit score.
Personal finance expert at MoneySuperMarket
Our expert says
“One of the first checks when you receive a new credit card should be: What’s my credit limit? Once you know this, you know how much spending power you have. But don’t view a credit limit as a spending target, think of it more of a safety net for your finances.”
Other useful guides
We have lots of useful guides to help you with your next credit card decision:
Compare credit cards with MoneySuperMarket
If you’re looking for a new credit card, then comparing options is quick and easy with MoneySuperMarket.
Just tell us a little about yourself and your finances, as well as what you want to use the new card for, and we’ll give you a list of deals tailored to your needs.
You’ll only know your credit limit once you’ve been approved, but you will be able to sort and compare deals by interest rate, any benefits or incentives, and how likely you are to get the card if you apply.
Once you’ve chosen the card you want to apply for, just click through to the provider to finalise the process.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.