What is a credit limit?

Understanding your credit limit might seem straightforward at first glance – it's just how much you can spend on your credit agreement, right? Well, yes and no. Your credit limit is actually a fascinating insight into how lenders view your credit health, and it plays a bigger role in your credit score than you might think. 

Whether you've just received your first credit card or you're a seasoned borrower, getting to grips with credit can help you make smarter financial decisions and potentially boost the amount you’re allowed to borrow. But there are also risks involved if you go over your limit.  

Let's explore what credit limits really mean, how they're set, and most importantly – how you can use them to your advantage.  

How is a credit limit decided? 

Credit limits vary depending on the lender, the specific account’s terms, and your individual circumstances. 

When you apply for credit, prospective lenders will view the information on your credit report – including your credit history – to decide whether to approve your application. If they approve your application, they’ll also use this information to determine your credit limit.  

Lenders tailor the amount of credit offered to their customers based on each one’s individual circumstances. So, the credit limit you’re offered can be different from the one advertised on the product you applied for.  

What factors impact your credit limit? 

You can find your credit limit in the terms and conditions of your paperwork. The following factors influence the credit limit that you’re offered: 

• Borrowing history: If you’ve consistently made your loan and/or credit repayments on time and have managed your borrowing well, you’ll have a better chance of securing a higher credit limit. 

• Income: How much you earn and the amount remaining after settling your monthly bills, such as rent and groceries, could also affect how much credit a lender offers you. This is only done for some products.  

• Current credit commitments: Lenders may consider the total value of your existing debt on any other credit cards, loans, or overdrafts you have, as well as your mortgage (if you have one). Consistently spending close to your limits on other cards may signal to lenders that you’re too reliant on credit and are possibly struggling to manage your borrowing.  

• Your current credit limits: Lenders also account for the total amount you’re able to borrow across all your lines of credit.  

• The lending criteria of the lender in question: Each prospective lender has their own lending criteria, and different credit deal options. While some factors can count towards getting your application approved, each financial service provider lends according to its own terms.   

For example, having an adverse credit history – such as a County Court Judgment (CCJ) or Insolvency – may decrease the pool of lenders willing to extend credit to you. You’ll likely still find lenders who will approve your application, but they might offer less desirable terms, such as a higher interest rate or a lower credit limit.     If you’re offered less credit than you’d hoped for, keep in mind that your current credit limit isn’t permanent. There are always steps you can take to help improve your credit health, making it easier to get the green light in future.  

What happens if you go over your credit limit?

 Your credit limit is the most you’ve agreed to borrow against a particular facility, and breaching this agreement usually comes with consequences. So if you do try to make a purchase that takes you over your credit limit, your lender could decline the transaction. On the other hand, the transaction may also go through.  

Whether your lender approves or denies any transaction that exceeds your limit depends on their systems and policies. But keep in mind that if this transaction does go through, there can be potential repercussions, such as:  

• Penalty fees. Your lender could charge you a penalty fee of around £12 (this is the amount advocated by the Office of Fair Trading).  

• Losing promotional offers. Exceeding your credit limit could see you lose the promotional offers or rates that came with your product. 

• Less favourable terms. Lenders may consider it riskier to lend to you if you go over the limit, and as a result, they may decide to raise your interest rate or even lower your credit limit. 

• Card blocking. Some lenders may decide to block your card if you exceed its credit limit until you can reduce or settle the balance. 

Importantly, prospective lenders can also see your credit limits, how close you get to them, and any late payments when viewing your credit report. So if you frequently exceed your credit limit or consistently borrow close to it, lenders might conclude that you’re struggling to manage your credit. This can go on to negatively impact your credit score and future credit applications.  

Can you increase your credit limit? 

You can apply to have your credit limit increased, and your lender will then decide whether to approve the increase or not. While applications to increase your credit limit can usually be submitted online, some banks require their customers to call or visit one of their physical branches.   

It’s important to keep in mind that lenders will likely conduct a hard credit check of your report as part of the application process. So the information on your credit report impacts their decision to approve or reject your request.  

Improving your credit score to increase your credit limit

 A higher credit score and a positive payment history can boost your chances of securing a credit limit increase. If you’re concerned that your credit report might be holding you back, here are some ways to improve it over time.  

• Monitoring your credit report. Keeping an eye on your credit report and how you may be viewed by lenders is an important first step.  

Your credit report will list information such as your personal details, borrowing history, Electoral Roll registration details and any court information relevant to you.

Knowing what’s on your report is the first step to getting it up to scratch for lenders to see. At Checkmyfile, we provide the most detailed credit report you can get, allowing you to see all the information held by the UK’s three main credit reference agencies (CRAs) – Experian, Equifax, and TransUnion – in one place.   

• Making sure your name and addresses are up to date. Name changes through marriage or divorce, for example, should be amended on your report, as should your current address. A simple but effective way to boost your credit score is by making sure you’re registered on the Electoral Roll at your current address. This allows lenders to verify your details and where you live.

• Keeping your credit report free of errors or inaccuracies. If any of the information on your report is wrong, you should get it fixed. Start by contacting the lender who has reported that information first to see if they can resolve it. You may need to raise a dispute with the CRA’s– if you have a Checkmyfile account, we can get in touch with them on your behalf.     Once fully investigated, the error should be amended, as both lenders and the CRAs are legally obligated to make sure that the information held on your report is accurate. 

• Checking and updating your financial associations. Your financial associations can impact your credit applications because lenders may view their credit reports alongside yours, even if they aren’t named on the application.  So if you have any financial associations on your credit report that are no longer valid – or ones that are incorrect entirely – you might want to contact the CRAs about having them removed. At Checkmyfile, we can raise a dispute with them for you. 

• Being credit active and maintaining monthly payments on your credit agreements shows lenders that you manage your finances well.    

• Spacing out your credit applications. When you submit a credit application, lenders perform a hard check that’s recorded on your credit report. Having several hard checks in a short span of time can negatively impact your credit score. 

Each lender has their own criteria for credit approval, so rather than aiming for a certain credit score, it’s good practice to make sure the information on your credit report is accurate and, if you’ve taken out credit, shows positive payment history. 

What does credit utilisation mean?

 Your credit utilisation rate is the percentage of your available credit that you’re using compared to your credit limit. Lenders consider this rate when deciding whether to approve a credit application.   

For example, if you have a total of £3k available credit and your borrowing typically sits at around £1.5k, your credit utilisation rate is 50%. A credit utilisation rate of around 30% could be beneficial to your credit score as it can signify that you’re actively using credit but don’t heavily rely on it. In the example of a £3k credit limit, this would be about £900.  

To recap: 

Your credit limit is simply the most you’re allowed to borrow from your lender on the particular product at any one time. The advertised credit limit for a product is unlikely to be the one you’re offered; lenders consider various factors, such as your borrowing history and income, before offering you a personalised credit limit.   

Attempting to exceed your credit limit will result in one of two outcomes; either your transaction will be declined, or it may go through with some consequences (such as a penalty or the loss of a promotional offer). It’s always best to stay within your credit limit.   

If you’d like to increase your credit limit, you can submit an application to your lender, and they’ll decide whether to approve the increase or not.