So you’ve been accepted to borrow credit – yay! But hang on a second… why is the credit limit much lower than advertised?
This is a common event in the world of credit. After jumping through hoops to prove your creditworthiness, it can be disheartening to get a lower amount of credit than you originally wanted. Bear with us as we guide you through the ins and outs of your credit limit and what options could be out there for you.
What is a credit limit?
Okay, before we do anything else, let’s get to grips with the basics. Your credit limit is simply the maximum amount you can spend on your credit card or overdraft. When you apply for a card or overdraft, you’ll only see the maximum amount they could offer you and the actual amount you have will be disclosed in your credit agreement.
Why have I been given a small credit limit?
Lenders make a decision about your credit limit based on a few factors. The information they typically look at includes…
Lenders look at how responsible you are when it comes to borrowing money. Let’s say you’ve missed a payment here and there – some lenders may refuse to lend you any money, while other lenders might look to lend but just with a lower credit limit.
Thin credit history
If you’ve never borrowed before, lenders could struggle to work out how trustworthy you are when it comes to making repayments on time. You may be accepted for a credit card – like a credit builder card to help you build your credit file – but it’ll likely come with a smaller credit limit attached.
Lenders looking at your salary will see how much credit you could afford once you’ve paid for bills and other living costs. If you’re not left with a reasonable amount to live on once the bills have gone out, you could either be rejected or given a card with a much smaller, more manageable credit limit.
You might have other credit commitments which can affect your credit limit. If you’re making lots of repayments on existing credit, the lender might lend but reduce your credit limit to only what you can afford.
A low credit limit is designed to keep you from borrowing more than you can afford, so banks make a judgement call on your affordability when they decide on your limit. In short, if you have a poor or thin credit history, you could find that lenders may reject you for credit or offer you a smaller credit limit.
Can I ask for a larger credit limit?
If you’re looking to increase your credit limit, you might be wondering what you could do to change it. Smaller credit limits can be a barrier if you needed the extra credit to cover larger emergency purchases – so it’s understandable if you’d like to increase it. If you've been reliable in making repayments on time and in full each month, you could ask the lender to increase your limit. But if you’re a new customer, you’ll probably have to be patient.
Think of it like starting a new job – if you’ve started a new role as an intern, you wouldn’t ask for a promotion within the first few days of the job. You’d need to work hard and prove you’re a dedicated worker for at least a few months before you’d even think about asking for a promotion or raise.
Well, it’s the same for credit limits. You’ll need to show that you can use your card responsibly for several months before asking them to increase your limit. This means using less than half of your available limit and making payments on time and in full each month. If you do this, the lender could offer to increase your limit before you even ask!
Only ever ask for an increase if you’re completely confident you won’t overspend and you can afford to repay the balance. If you don’t, you could end up struggling to make payments which could affect your credit report and access to credit in the future.
Wondering if your credit score will affect your job application? Find out here.
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