Going over your credit limit can have very serious consequences including penalty charges and leaving a negative mark on your credit report. So if you need to borrow extra cash it's important to check whether or not you can increase your credit limit first.
The credit limit decides the maximum you are allowed to borrow. For example, if your credit limit on a credit card is £3,000 then you can't go over that amount on your spending.
The credit limit on a credit card or overdraft is set by the lender and will usually be decided at the time of your application being approved. As a result, the credit limit may come as a surprise to you and could potentially be far lower than what you had hoped for.
Lenders usually have a maximum credit limit they are not willing to go over, especially for new customers, but they will decide your credit limit based on various factors in your application, including your credit score.
With a credit card, the credit limit will be stated in your initial letter received in the post that came with your credit card. This will also state what the penalty fees will be for going over your credit limit. With an overdraft, you will get told what the credit limit is when you sign up for your current account.
In both cases, you can call up your bank or credit card provider to find out what it is.
Your credit report and score is the biggest factor for the lender in deciding what your credit limit will be. Of course, many lenders will likely have their own limits set for new customers, so even with an excellent credit score, you still may not be able to do anything to increase the amount you get.
When you make your credit card or current account application, you will be asked about your income and your credit report will be checked. The higher your income, and the higher your credit score, the more likely it is that you will be given a higher credit limit.
It all comes down to risk for the lenders. If there is any risk that you might fail to repay your debts, then if your application is approved it will likely be with a high interest rate and a low credit limit. This is to discourage customers borrowing large amounts of money.
The more trustworthy and less of a risk you seem, then the more likely it is that you will get a higher credit limit and a lower rate of interest on your borrowing.
You can increase your credit limit on a credit card or bank overdraft simply by calling up your provider and asking for one. But, that doesn't guarantee you will get one.
Generally, it is better to be a customer with the same bank or credit card for at least six months before asking for a credit limit increase. Within that time, you should have shown a great track record of paying off your debts in full and on time.
If the lender sees that you are slow to pay off your debts in full and that you are regularly making repayments in instalments, then they will be reluctant to increase your credit limit. Their thinking will be: if you can't repay your debts in full with the limit you have, why would you be able to do so with even more credit at your disposal?
And you should never go over your credit limit, even if the penalty fee is something you can afford to pay. It will show up on your credit report and score and will be seen as a major red flag for future lenders if you want to get another credit card, get a new mobile phone contract or apply for a mortgage.
Your provider may also significantly reduce your credit limit and possibly increase your interest rate as further punishment for going over the limit even just once.
Before you consider increasing your credit limit, it might be worth looking at better deals on the market first, or even weighing up whether or not you actually need the extra money.
However, if you are looking at getting out another credit card, beware of overstretching yourself. Ask yourself if you can handle two separate debts and if you will be able to manage them both in a way to avoid paying anything extra in interest.
If your credit score is quite good and your lender says they are unable to offer you an increase in credit limit, then there are several options on the market to help you borrow extra for less.
You could take out a 0% purchases credit card that allows you to avoid paying any interest for long periods – many of the best deals have 0% periods lasting over 12 months.
You could also consider taking out a premium credit card, which usually has no or very high limits. These are aimed at people with high incomes and very good credit scores.
These credit cards are usually known as charge cards as they usually have no interest rate. The way they work is that you are obliged to pay the amount you use in full at the end of each month, so it's technically not borrowing. You do, however, get additional perks like frequent flyer miles and discounts.
There are, inevitably, high penalty fees to pay if you do fail to repay the amount in full. Again, this option is only really available if you have an excellent credit score.
If you have a poor credit score, then it might be better, in the long run, to try improving it before asking for an increased credit limit or applying for any new credit cards.