How do credit cards work?

Credit cards are a way for you to borrow money. While debit cards are linked to your bank account and allow you to spend your own money, credit cards let you borrow money which you have to repay later.

What is a credit card limit?

When you’re issued with a credit card, it comes with a specified limit. The credit limit is the maximum amount of money, in total, you can borrow on your credit card at any one time.

Think of your credit limit as the total amount of money you can borrow on your credit card. If your credit limit is £4,000, you can borrow up to £4,000 on your card. If you’ve already borrowed £1,000, then you have £3,000 left to borrow.

Your credit limit is:

• The total amount of money you can borrow on your credit card.
• An initial limit set by your credit card provider when you’re first issued your card, but this limit may change over time – lenders can choose to increase it or reduce it, depending on how you manage your account.
• Based on your individual circumstances and credit score.

How is my credit limit calculated?

Each credit card provider has their own way of calculating a unique credit limit for you, based on their assessment of your personal circumstances, including:

• Your available income: How much money you have left after paying your usual living expenses, like a mortgage or rent, bills, groceries, and other regular costs. The more you have left over, the higher your credit limit could be as you have more left to contribute to repayments.

• Your credit history: Companies like Equifax, Experian, and TransUnion, keep credit histories of UK adults that show how much money you’ve borrowed, from where, and how reliably you’ve paid it back. If you have a good credit history, where you’ve borrowed money and not missed any monthly payments, you’ll likely be offered a higher credit limit. Your credit limit will be lower if you’ve missed or defaulted on payments. You can improve your credit score over time by using credit responsibly.

• How much money you are already borrowing: This focuses on the level of debt you have already, including a mortgage, bank loans, other credit cards, or overdrafts. If you’re already borrowing a lot of money, you may be offered a lower credit limit – similarly, if you have never borrowed before it may be difficult for lenders to assess how likely you are to repay.

• Your other credit limits: The credit card limit you’re given will be influenced by any other unused lines of credit you already have elsewhere.

• A credit card provider’s own lending policies: Credit card providers vary in their approaches, and the same person could be offered different credit limits by different providers.

How much of your credit limit should you use?

How much money you borrow with your credit card, and how well you pay it back, will be recorded in your credit history.

Typically, you’ll have the best effect on your credit rating if you only use a certain amount of your credit limit, usually between 25% to 50%^[1]. This shows that you can responsibly use your credit card without relying on it too much. Don’t forget, you should only borrow as much as you can afford to repay.

What happens if I go over my credit limit?

If you go over your credit limit:

• Any further transactions will likely be declined, including any regular payments you have set up on your credit card.
• You may be charged a penalty fee for going over your limit.
• You may lose any promotional rates you’ve been given.
• It’ll be recorded on your credit history and can harm your credit score.
• Your provider may reduce your limit or even cancel your credit card if you regularly go over the limit

3 simple tips to help you stay under your credit limit:

1. Always know how much money you’ve borrowed on your card and how much limit you have left – regularly check online to make sure.
2. Set up email or text alerts to notify you when you’re getting near your limit.
3. Set up a Direct Debit, or a regular payment from your bank account, to make sure your monthly payments are made automatically to ensure your card is cleared, or partly cleared, each month.

What is a good credit limit?

There’s no single number that can be viewed as a good or bad credit card limit, it depends on your own situation.

How do credit limits affect my credit score?

Having a higher credit limit won’t necessarily impact your credit score. If you keep your balance low, and make your repayments every month, this could improve your credit score. But if you spend near, or over your credit limit every month, this could suggest you’re struggling to manage your finances which could have a negative impact on your credit score.

What are the advantages and disadvantages of a high credit limit?

A high credit limit can have both pros and cons:

Can my credit limit decrease?

Yes. Your credit card limit can be reduced for a number of reasons, including:

• You miss monthly repayments, making your provider view you as a greater credit risk.
• The specifics of the credit cards your provider offers change.
• New laws or regulations are introduced.
• Your personal situation changes, such as you lose your job or move to another one.
• Your credit rating changes for a reason not related to your credit card.

If your credit card provider does lower your credit limit, you’ll be informed of when it will happen, although they may not explain why.