If you’re applying for a credit card, you should have an idea of what the right credit limit for you is – but what exactly is a credit limit?
We take a look in this blog.
A credit limit is the amount you can spend up to on your credit card – although don’t make the mistake of simply using it as your spending limit. Some credit cards offer credit limits of several thousand pounds, but if you spend up to this it could take you some time to pay it back – and you may end up spending quite a bit on interest.
So, while you can spend up to your credit limit, don’t feel that you have to. The most affordable way to use a credit card is to only spend what you can afford to on it and then clear the balance at the end of the month.
When you pay your balance in full each month, you avoid spending anything on interest. As your credit limit may be a thousand pounds or more, if you spend up to this, you could find it impossible to clear your balance in full each month, which means you should expect to pay interest.
Can I ever spend up to my limit?
You may want a credit card simply for emergencies or day-to-day spending, in which case it’s unlikely you’ll ever need to spend up to your credit limit. However, if you want one to make an expensive purchase with that you can then pay off gradually, you may spend close to your limit.
If this is what you plan to do with your credit card, it’s worth shopping around for one that offers a low APR, or even 0% on purchases for a set time. This special rate won’t last forever, so make sure you pay enough each month so that the balance will be clear by the time the offer ends.
Rather than making a large one-off purchase on the card, you may want to move the balances of your existing credit cards over so that you only have to make one payment a month instead of several. You can do this with a balance transfer card, which you can find out more about here.
What happens if I go over my limit?
We’ve looked at how best to manage your credit card spending, but now for a word of warning – never spend over your credit limit.
Going over your spending limit, even if it’s only by a few pounds, can result in your lender issuing a penalty against you. This will increase your balance and mean you have to pay more interest in addition to the fine itself.
Maxing out your credit limit could also have an effect on your credit history. When you apply for credit, lenders look at how well you’ve managed your borrowing in the past. If they can see that you’ve spent up to your limit or more, they may worry that lending you more will stretch your finances too thinly.
Can I increase my credit limit?
If you think you’re in danger of going over your spending limit, ask yourself why this is. If it’s because you want to make a large purchase on your credit card to help you spread the cost but the price tag is over your credit limit, speak to your lender to see if they’d consider extending this. If you’ve used your card responsibly and never missed your minimum monthly payment, they may agree to this.
However, if you’re relying on your credit card for everyday essentials, you should avoid extending your limit further. All you’ll be doing is increasing the amount of money you owe and stretching your budget even thinner. Instead, it might be worth seeking expert money advice to help you get back in control of your finances.
Can I lower my limit?
If you’re worried the temptation to spend up to your credit limit is just too great, you may wonder whether it’s possible to lower this threshold. However, your lender is unlikely to agree to this – and there’s a reason why it’s a good idea not to ask.
Credit card utilisation is how much you have borrowed compared to how much you could borrow. This is something lenders look at when you apply to them for credit.
You can find out more about credit card utilisation here, but to give you an example, if you have a credit card limit of £1,000 and you’ve spent £250 on it, this means your utilisation is 25%. If you were to lower your limit to £500 and not spend any more, your utilisation would still increase to 50%.
To a lender, this looks as though you have spent half the credit you have available to you, rather than the quarter it originally appeared. So by lowering your credit limit you’ve actually taken yourself closer to it, and any new lender may look unfavourably upon this.
A better idea is to do your best to resist the temptation and only spend what you can afford. Lenders are looking for responsible borrowers, and not maxing out your credit limit is one way to show you’re this sort of person.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.