What is a credit limit? Can it positively or negatively affect my credit score?

If you have a credit card, you might know of what’s called credit limit but if you’re not sure, you’ve come to the right place. In this blog, we’re answering all your questions about credit limits and how they can affect your credit report.

What is a credit limit?

Your credit limit is the maximum amount of money that you are able to borrow on a credit card. The credit limit is set by your credit card provider and is completely individual to you. If you’re unsure of what your limit is, you can ask your provider, or view it on your card statement.

Your credit limit is calculated by looking at:

• How much you earn 
• How much you owe 
• Any other credit limits you have 
• Your repayment history 
• How long you have been a customer with that provider ‍

‍Having a great credit score can improve your chances of increasing your credit limit. We’ve got loads of information on building your credit here.

What is a good credit limit in the UK?‍

There’s no set definition of what a good credit limit looks like, but as a guide, it should be an amount that you could reasonably afford to pay back, as well as being enough money to help you out at the times when you need to use credit. It’s all about balance.

‍Does a higher credit limit help your credit report though? When it comes to your credit score, there isn’t a magic number that is good or bad. It is about your individual circumstances.

But spending up to the maximum of your card’s limit every month, whatever it might be, won’t look great on your credit report. 

This is because lenders want to see that you’re not too reliant on using credit. If they were to glance at your credit report, they may be concerned that you’re not managing your money well.

Does a lowered credit card limit affect your credit score?

Sometimes you will be budgeting and trying to avoid spending more than you can afford. One way you can do this is by reducing your credit limit. 

This can affect your score but it depends on your credit balance.

If your credit limit lowers but the amount you spend with your credit card stays the same, then your credit utilisation rate would go through the roof. Normally it’s best to keep it at about 25-30%.

Credit utilisation can be a complicated concept but let’s break it down. For example, it works like this: let’s say you have a credit limit of £1,000, and you’d like to lower that limit to £500 to help you budget better. That’s fine to do. But if you have a pending balance of £250 to pay off on the card, then your credit utilisation rate would go from using 25% of £1000, to 50% of £500. 

This is important to keep an eye on, because having high credit utilisation can have a negative impact on your credit report. As a guide, only request to lower your credit limit if you can budget well enough to reduce your credit balance at the same time to keep a low credit utilisation.

Also, be mindful that your credit card provider is usually able to reduce your credit limit at any time, and for any reason. Lenders tend to keep this in place so they can mitigate risk. This is another reason to keep your credit card balances in a manageable place for you to repay easily.

Does increasing your credit card limit improve your credit score?

Increasing your credit limit — but not your credit balance — reduces your credit utilisation rate. This is a good thing for your credit score. Your credit utilisation rate can have a big impact on how your credit score is generated. 

So to recap: A lower credit limit might be useful if you are budgeting or just trying to avoid those spending temptations.While a higher credit limit could be better when you are considering a larger purchase, like a car. But you still shouldn’t max it out in either case. Remember, aim to keep your balance lower than 25% of the credit limit to be on the safe side.

Does applying for a credit limit increase affect your credit score?

Applying for a credit limit increase will result in a temporary dip in your score. But don’t worry, this is totally normal. This also happens anytime you borrow money through a loan, or when a hard credit check is run against your credit report. The good news is that after about six months, your score can be back on track as long as you’ve shown you can responsibly pay off credit.

However, it’s worth mentioning that if you apply for multiple credit limit increases in a short space of time, you’ll likely see your score go lower and take longer to improve.

Does going over your credit limit affect your credit score?

It’s best to avoid going over your credit limit if you can. It will often be possible to go over your agreed amount but just because your credit card might let you do it, it doesn’t mean it’s a good idea. It will have a negative impact on your credit score. 

If you find yourself going over your credit limit repeatedly, you may even see your credit limit reduced as well. As mentioned before, this can have an affect on your credit utilisation rate, which has a big impact on your report.

A great way to avoid going over your limit is to set any alerts and notifications which are available from your bank or credit card providers. They will let you know how much of your credit limit you are using, help you avoid missed repayments, and keep you on top of your money. Looking after your finances will look after your credit.

Does a declined credit limit increase affect your credit score?

If you apply for a credit limit increase, you will sometimes find that your application is declined. There are a few reasons why the credit card provider might make this decision:

• They believe you may not be able to afford to repay your increased credit based on your earnings
• Your repayment history indicates poor money management
• You have too many other borrowing agreements

The level of impact that a declined credit limit increase has on your report depends on whether the lender does a hard or soft credit search as part of your application. It isn’t always clear which sort of search a lender will do, so if you’re unsure, make sure you check in with them beforehand. You can find out more about hard vs soft credit checks in our blog.

‍Hard credit searches will likely reduce your credit score temporarily so it’s important to make sure you are as likely as possible to be accepted when you apply. It’s not a big problem if your score dips from one check but too many searches in a six month period will begin to have a negative impact.

What can I do if my credit limit reduced my credit score?

First off. Don’t panic! Most of the effects your credit limit has on your report are temporary. This means that you can raise or lower your credit limit when you need to and within a short time, assuming you’re keeping up any repayments and looking after your finances, your credit report (and in turn, your score) will be back to its glittering best. 

If you’d like to really see your credit report grow stronger, you might like to consider joining Loqbox. As a member, you can save while building your credit, report your rental payments to the CRAs and learn more about taking control of your finances. To find out how to get started, head here.