When we get our first credit card, it can often be an exciting but daunting experience. If we don’t understand the ins and outs of what a credit card is, it can sometimes lead to overspending and potentially getting into debt.
Understanding our credit limit can help us to manage our money better, be a responsible spender and make our repayments on time.
So, what is a credit limit?
Your credit limit is the maximum amount of money that your credit card provider is willing to lend you. It isn’t restricted to a particular time period as a loan is, and as long as you stay within your limit and make regular payments at or above the minimum amount, you can continue to borrow money.
How do companies calculate your credit limit?
The money a lender is willing to offer you is based on a multitude of different factors. Understanding this could help increase your chances of getting credit in the first place. There is a good reason why many credit card providers don’t disclose what your limit will be until after you’ve applied for a card.
Until the lender has done a full credit check on you when you apply, they don’t have a clear picture of your financial situation. This check takes into account whether you have borrowed in the past, how much if you have and if you made regular, on-time payments. They also can’t see whether or not you’ll actually be able to make repayments based on how much you earn without doing this check.
Each credit card company will have different factors that they consider when you apply for credit. These will include your personal earnings (salary, benefits, bonuses), credit history, any current debts (including mortgages and loans) and how much available credit you may have already.
So, you’ve been accepted, great! What happens if you exceed your limit?
Depending on the lender, you may face certain penalties if you ever go over your pre-agreed limit. Your credit card provider may charge you a fee, remove access to any promotional rates you may have received such as or 0% interest on purchases within the first 6 months, and they may even increase your interest rate.
All may negatively affect your credit score, which in turn will affect your chances of getting approved for credit in the future. You should always avoid going over your credit limit. Some providers even offer a text service to let you know if you’re getting close. You can often set these yourself by logging onto your online account.
If you do go over, don’t panic. Contact your lender as soon as you can and discuss options with them. By doing this you’re showing them that you take exceeding your limit very seriously and they may be able to take an immediate payment off you which will take you back under your limit.
Understanding your credit limit is incredibly important so you can ensure you’re being a responsible spender, as well as improving your credit score, which will help you in the long run.
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