What Is A Credit Limit?

Author · Modified on 16 January, 2022

A credit limit is the maximum figure of money that a lender will let you spend on your credit card or on your line of credit.

Remember, this is an upper limit, not a target! You should aim to stay within this figure, not aim to reach it.

Key Points:


  • A credit limit is how much funding you are able to receive. For instance your credit card allowance is a form of credit limit.
  • Your credit limit is set according to how much you earn, how reliably you have paid off debt in the past, and how many other lines of credit you hold.
  • If you exceed your credit limit, you could incur further fees and damage to your credit score, making it more difficult to borrow in future.
  • If you need further funds beyond your current lines of credit, you could consider a loan. The average loan is $375, and should only be used if you absolutely need it.


Why Do I Need A Credit Limit?


A credit limit refers to how much you are allowed to spend on a given credit card or line. The more you spend on your credit card, the less credit you have left to spend. Therefore, it is important to plan ahead and make sure you have enough credit to cover your personal costs.

This amount is set by your lender to protect their business. Lenders want to set a limit high enough that you want to use their service, but low enough that repayment is not too challenging.


How Is My Credit Limit Set?


Lenders want you to borrow from them, but also want to make sure that you can afford to pay them back on top of your other costs. To safely do this, the following will be taken into account:

  1. How much you earn. If you have no to low earnings, lenders will likely consider you an unsafe investment. If you have little money flowing in, they will question how you will be able to pay them back.
  2. Your credit history. If you have a history of failing to repay your debts and defaulting on payments, lenders will be unwilling to lend you large sums of money. This could represent potential future losses for them.
  3. Limits on your other credit cards. If you have multiple cards with high limits, the lender you are approaching will realise you have high debts already. They may then be unwilling to set a high limit.


Before setting a credit limit, the lender will want to be confident that you can pay it back


What If I Exceed My Credit Limit?


If you go beyond your credit limit there are a few possible consequences. You may find that your card is declined when you attempt to make purchases, as essentially you have no funds left to spend. Your credit provider may also charge you additional fees on top of the interest on your credit, making your borrowing even more expensive.

You may also encounter future problems. You may be offered lower credit limits in the future, or your lender may go as far as to close your account. This becomes even more likely if you go over your credit limit repeatedly.

This is why it is integral to check how much credit you have before making purchases to avoid unintentionally exceeding your limit.

A credit limit is the maximum figure of money that a lender will let you spend on your credit card or on your line of credit.

Remember, this is an upper limit, not a target! You should aim to stay within this figure, not aim to reach it.


What If I’m Not Satisfied With My Credit Limit?


You can ask your lender to adjust your allowance. In some cases, they will adjust how much they are willing to lend you, or could adjust the terms of repayment to make it easier to repay.

You should remember that they have done their research on your financial history in determining your credit limit. This means that they may be unwilling to alter their offer, but it is worth asking.


more than one loan
Exceeding your credit limit can result in additional fees and future issues


And If That Doesn’t Work?


Stay calm! There are always ways to better plan your finances. You could try and apply for a payday loan if your circumstances are urgent but remember that this is best for borrowing small amounts of $500 or $1,000 and should only be used short-term.. Receiving an unexpected medical bill, for example, would be a reason to apply for a payday loan, credit union or installment loan.

Alternatively, you could download a budgeting app such as Honeydue, and try and track your spending. This will allow you to spot where you are overspending and try to pinch the pennies. Some budgeting apps will remind you to pay your bills to prevent damage to your credit history.

Other methods of financial support can be found in friends, family, or through a financial adviser.


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