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Understanding your credit limit and how you can or should use it will help you to build a better understanding of your credit rating.

If you’ve ever had a credit card or used a line of credit with a bank or financial institution you already know that you have a limit of how much you can spend. This is called your credit limit. But what is it exactly? A credit limit is defined as the total maximum amount a lender will give to you to spend on your credit card or line of credit.

Knowing your credit limit and reaching it are two different things. It’s not always a good idea to go up to your credit limit. Learning how to manage your credit responsibly is a key way to build a stronger credit history and rating. It will also make you more attractive to a lender or financial institution in the future.

 

Credit limit example:

Based on your income, credit score and checks carried out by the credit card provider, they establish that you can have a credit limit of $2,000 per month to spend – and you just need to pay this in full at the end of each month to avoid being charged any fees.

 

How do I find out what my credit limit is?

If you have a credit card with a bank, typically they will tell you what your credit limit is on every statement. It’s also normally available online through their mobile app or online portal. You can also call your credit card provider using the number that’s on your statement or the back of your card to find out what your limit is.

How does a bank work out what your credit limit is?

As part of being a responsible lender a credit card provider works out what your limit is. They want the limit to be low enough that you won’t spend more than you can pay back but they want it to be high enough that you’ll use the card. They want a credit card to be useful for you in situations where you need it most.

To determine what that limit is they will consider the following:

  • Your monthly income
  • Your current credit score and history
  • Your debt as a percentage of your current income
  • Limits you have on other credit cards

There are also different types of credit cards available which have an impact on your credit limit. Limits on some cards are the same for virtually everyone. Other cards have a range of credit limits depending on the range of factors we’ve listed above .

Why does my credit limit matter to a provider?

A large part of your credit score is calculated by how much of the total credit available to you you’re using. This means that the limits and the balances from every credit card you currently have and are using are taken into account. These factors all determine what your credit score is.

Another reason you want a good credit score is so that you can get financing on big purchases like a car house or even home repairs. Some jobs even take into account your credit score when determining your eligibility for the role .

On average a lender prefers that you use less than 30% of your available credit limit. For more information, visit how does a credit card work.

30%
of
$1,000

is
$300

$600
is
60%

of
$1,000

As best practice it’s always a prudent idea to keep the balance of your credit card as low as you possibly can in relation to your total credit limit. The very best practice is to pay off your entire balance in full at the end of each month. If you’re unable to pay the full balance then paying as much over the minimum as you can will reduce the interest payable on your credit card in the future.

Did you know?

The size of your credit limit compared to how much money you have outstanding is called your credit utilization rate. In fact it’s the second largest factor after your history of payments in calculating your credit score. One of the easiest ways and one which is often overlooked to raise your score is by simply lowering the percentage of your usage of credit limit. The easiest way to do this is by paying down your balances owed or seeing if your credit card issuer can increase the limit available to you.

What if I go over my credit limit?

Spending too much money with your credit card can have negative consequences. There’s a number of ways that you may be impacted financially which can include decreasing your credit limit, adding overcharge limits to your balance or even removing your credit card. Lenders will sometimes let you get away with this by charging fees but in extreme cases you can lose your credit card. In some cases your interest rate might also be increased if your credit history indicates that you consistently go over the limit set by your credit card. This could also mean that your credit score is impacted negatively. This is why it’s crucial to know what your credit limit is and be conscious of it when making purchases day to day.

Why did my credit limit go up or down?

It is common practice for credit card issuers to review how you’re using your credit cards and then change your credit limit accordingly. There are a number of common reasons why your credit limit might have gone up or down.

Increases

  • You regularly pay on time.
  • Use your existing credit responsibly.
  • Your income increases.
  • You request and receive an increase in your credit limit.
  • Your credit score increases.

Decreases

  • Your debt has increased
  • You only occasionally use your card
  • You regularly miss payments
  • Your credit history and therefore credit report is incorrect
  • Your identity has been stolenĀ 

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