A credit limit is the maximum amount of money which can be charged to a revolving credit account. When a credit card is used, the amount spent is subtracted from the limit. This leaves the amount left as the available credit which you are free to spend until the credit limit is reached.
How Does a Credit Limit Work?
Credit limits are put in place by the bank. The credit limit is the maximum amount of credit which will be available to you once using a credit card or account. As your card or account is used, the amount of available credit left will decrease, demonstrating that you are getting closer to reaching your credit limit.
Transactions such as cash advances can also reduce the amount of available credit in your account, therefore meaning you are also getting closer to reaching your credit limit.
If you make payments on your credit account monthly, you will move further away from reaching your credit limit, and the amount available to you within your account should increase.
How Is a Credit Limit Determined?
The bank or lender will determine your credit limit by looking at a variety of factors. Lenders will usually assess your credit reports, application and score.
Lenders will be making these assessments through looking at payment history, to see whether you have been able to pay your bills, including making monthly credit payments. They will also be looking at whether you have previously filed for bankruptcy or had debts sent to collections in order to determine an appropriate credit limit.
In addition to this, lenders will assess how many current accounts and loans you have open or ongoing, alongside the account history. Lenders will assess how long these accounts have been open for, and which types of loans you have recently applied for. They will be required to take into account whether you have recently applied for excess credit through opening additional accounts.
Finally, lenders will assess your debt alongside your income. They will need to see how much you owe and will compare this with how much you earn. This is to check whether you currently make enough money to cover your monthly bills, and how much credit you have available.
What Can You Do If You Aren’t Happy With Your Credit Limit?
If you aren’t happy with your credit limit, you can ask for it to be increased. In spite of this, it is important to remember that your lender has decided on your credit limit based on a variety of factors and has decided on a limit they think is appropriate for you.
On occasion, the lender will also alter your credit limit themselves. This means that they can increase or decrease the limit, changing the amount which is available to you.
What Happens If You Go Over Your Credit Limit?
If you go over your credit limit, it is likely that when you try and use your credit card, it will be declined. In addition to this, you may be charged a fee for exceeding the amount of credit which was offered to you.
Some lenders have an agreement in place whereby you consent to paying a fee every time you exceed your credit limit, but you should be made aware of what these fees will be in advance.
It is always important to check how much credit you have available in order to avoid exceeding your credit limit as this will cost you additional fees.