If you own a credit card, then there’s one important figure to bear in mind: the credit limit. This figure will have a considerable say in what can be achieved with the card. But how is your credit limit actually determined?
What Is a Credit Limit and How Is It Determined?
Let’s start with the basics. The credit limit determines how much you can borrow using a credit card. If the limit is set to £5,000, then you’ll only be able to purchase assets up to that value.
Different people might be assigned different credit limits, depending on a range of factors. These include the amount of money you’re bringing in, your credit rating and history, and your other debts. If you’ve been with a certain credit card provider for a long time, and you’ve never had a problem, then it might be that you can hope for a better score.
Of course, different credit cards also offer different limits, as well as different interest rates. It’s therefore worth shopping around to see what’s available.
Why Your Credit Limit Matters: Credit Utilisation and Your Credit Score
Your credit limit matters in the sense that it places a hard cap on the amount you can borrow. But it’s also considered by ratings agencies, too, when assessing your total borrowing. If you’re peaking close to the limit, then agencies might interpret this as risky behaviour. This may be reflected in your credit score, should you need to take out more debt. As a general rule of thumb, it’s worth keeping your credit utilisation (that is, the portion of the limit you’re actually borrowing) as low as possible. Think of 30% as a target.
Best Practices: Managing and Optimising Your Credit Limit
There are a number of ways you can limit your risk of maxing out, and send a signal to ratings agencies that you are a reliable debtor.
As we’ve mentioned, it’s best to keep your utilisation low. You’ll also want to act promptly, and only request that your limit be increased every once in a while. In most cases, it’s best to wait for your lender to automatically raise the limit, which might happen as you spend more time with a given credit card.
When and How to Request or Accept a Credit Limit Change
Limit increases are often offered in response to good behaviour. This might mean taking out debt, and repaying it promptly. Automatic increases, can, however, be rejected. You’ll typically have around thirty days to reject the limit.
However, there are some circumstances when you might want to ask for the limit to be relaxed. Don’t do this more than once every six months, however, as this may adversely affect your credit score.
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