Good question – but not one that has a straightforward answer. You see, your credit limit could go up either when your lender decides to raise it or when you request an increase.
But you probably want a more detailed answer than that! Keep reading below:
What is a credit limit?
On a credit card, your credit limit is the amount you can spend up to. You don’t have to spend up to this amount, and you shouldn’t ever spend more than it.
Spending more than your credit limit can put you in hot water with your lender, as you could have to pay a penalty. Plus, if you’ve had the benefit of a promotional offer, your lender might take this away from you if you’ve gone over your agreed limit.
It’s a good idea not to spend right up to your credit limit either. While you can do this and you won’t be charged for doing so, it’s not something we’d recommend. It means that without clearing a sizable chunk of your balance, you won’t be able to spend on the card again without exceeding your limit.
Another thing to be aware of is the impact spending up to your limit can have on your credit history. Spending all the credit you have available to you on your credit card is called ‘maxing out’.
When you apply to other lenders, they take a look at your credit history to see how much credit you currently have available to you. If you have maxed out one or more of your accounts, they may decide that you already have too much to pay back without them lending to you too.
How do I increase my credit limit?
You should think very carefully before you put up your credit limit. A higher limit means you may be tempted to spend more – and you’ll then have more to repay. You should never borrow more than you can afford to repay.
However, there may come a time when you’re confident with how you’re managing your spending and you’d like to increase your limit. As long as you’re having no trouble paying your current credit card minimum payment – and more if possible – you could ask your lender if they can increase your limit.
When you do, your credit card provider will check that you haven’t been late with your payments to them or missed one altogether. If you have, this is unlikely to do you any favours.
As well as looking at how you’ve managed their credit card, your lender will also take a look at your credit history. This details your credit agreements over the last few years and how well you’ve managed them.
"If you’ve managed your credit card well, there’s every reason your credit limit could be increased."
If your lender can see that you have several lines of credit already available to you, they may decide not to increase your limit at this time. Their concern will be that if they do, your finances will be stretched too far.
And if your credit history shows that you have had trouble with borrowing in the past and have missed payments – even if they were to a different lender – this will also cause alarm bells to ring. Your lender wants to be sure that you can be trusted to keep on top of your borrowing.
However, if you’ve managed your credit card well so far, never been late with or missed a payment, never exceeded your credit limit and your credit history is good, there’s every reason your request for a credit limit increase could be accepted.
Your lender could beat you to it
If you’re using your credit card responsibly and have been for some time, your lender might actually beat you to it and increase your limit without you asking. This shows they view you as a trustworthy customer.
But just because they’ve increased your credit limit, you don’t have to start spending more on your card. If your current spending habits are working out well for you and you’re finding your repayments affordable, why change things?
Can I lower my credit limit?
But what if, rather than increase it, you actually want to lower your limit?
Unlike increasing your limit, it’s unlikely that your lender will automatically lower it, although they might if you’re not using the card. Lowering your limit is something you will need to ask – and they may not agree.
After all, you don’t have to spend up to your credit limit. If you’re uncomfortable spending this amount, don’t. It’s quite simple really!
"You don’t have to spend up to your credit limit."
But you may feel that with a high credit limit, the temptation to spend is too difficult to resist. You can ask your lender if they’d consider reducing your limit, but it’s not always a good idea. The reason? Credit card utilisation.
This is the amount you’ve borrowed on your credit card compared to the amount you could borrow. Let’s make things simple – if your credit limit is £2,000 and you borrow £500, your utilisation is 25%.
The smaller your utilisation percentage the better in the eyes of a lender, as it shows that you’re not at risk of maxing out your card. Using the example above, if you were to lower your credit limit to £1,000, suddenly your utilisation has increased to 50% despite you not spending any more. That’s why it may be better to keep your credit limit as it is and resist the urge to spend more.
For more tips on using your credit card responsibly, come back and visit us soon.
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