Amanda Smith
Athena Cocoves
Credit cards allow you to spend borrowed money, but you don’t have an unlimited cash flow. Your spending power is restricted to your credit card’s credit limit.
What is a credit limit?
A credit limit is the maximum amount you can spend on a credit card. When comparing credit cards, you may see credit limits presented as a range that spans the minimum and maximum limits available.
A minimum credit limit is the lowest amount of credit available for a specific card. Standard personal credit card limits usually start at $500.
A maximum credit limit is the most you could charge to a credit card, and it usually goes up to $15,000. However, some cards have no limit or set the limit high at $100,000.
The average credit limit in Australia is $9800, according to the Reserve Bank of Australia.
However, you won’t be assigned a range when you apply for a credit card and are approved. Instead, the issuer will assess your finances and approve you for a specific limit. You can also usually request a specific credit limit, somewhere between the minimum and maximum, that best fits your budget.
Credit limit vs. available credit vs. credit utilisation
Even though a credit limit is the maximum amount you’re authorised to charge to your card, you won’t usually have access to the entire limit. The amount of money you could actually spend at a given time is your available credit.
To find your available credit, subtract your current balance from your credit limit on any given card. For example, say you have a $5000 credit limit. If you’ve already spent $1000 this billing cycle, you still have $4000 in available credit before you hit your limit. If you pay off your credit card in full, your available limit resets to $5000.
That $1000 is the amount of credit you’ve utilised so far. As your credit utilisation goes up, your available credit goes down. It’s best to keep your credit utilisation low — below 30% — as it is a major factor in your credit score.
What determines your credit limit?
Credit card limits, like credit scores, are unique to the individual and depend on the specific credit card and the bank’s policies.
Lenders will also consider a range of factors to determine your credit limit, such as:
- Your employment, income, assets and liabilities, which help lenders evaluate your ability to repay the money lent. Lenders can only give you a credit limit that you can repay within three years.
- Your credit report and credit score, which indicates your creditworthiness.
- Your payment history, which shows whether or not you regularly pay your bills on time.
- Your credit utilisation, which details how much of your current credit limits you’re using.
When determining your own credit limit, you should consider how much cash flow you like to keep as a ‘buffer.’ You might not need or even use the credit, but you may feel more comfortable with a higher limit in case of an emergency.
In addition, some cards, like charge cards, don’t come with a limit at all.
How to increase your credit limit
Previously, banks periodically notified customers of credit increases. As of 2019, banks can no longer legally offer unsolicited credit limit increases. Now, it’s up to you as the customer to make a request, which your bank will approve or deny. You can also decrease your limit if you’ll be tempted to use it or if you’re focusing on boosting your credit score.
The process of applying for a higher credit limit is straightforward. You can do it online at your bank. While it’s up to the discretion of the lender, you can improve your chances of a credit limit increase by:
- Using the card frequently while keeping your credit utilisation low.
- Maintaining a good history of repayments. As a general rule, the longer you’re a customer, the easier it is to get a credit increase.
- Keeping reasonable expectations, with small incremental increases.
- Avoiding multiple applications with various banks.
To ‘see’ what banks see, check your credit before requesting an increase. If it’s weak, first work on building up your credit score. Then, review it throughout the year to see if it meets your current needs.
Should you increase your credit limit?
You may want to boost your credit limit if you’ve got a big purchase coming up, you like the peace of mind of available credit, or you want to use it to earn reward points. As with most personal finance decisions, be responsible and only take on what you can confidently handle. Try to avoid making decisions on a whim or when stressed or overwhelmed.
A credit card is a wonderful tool to have in your financial life. It can help you out if you’re in a bind, allow you to pay for big purchases (with the safety of insurance), and let you build your rewards points for further savings. Having plenty of available credit will also give you the opportunity to prove you’re responsible for managing a higher limit.
That said, there’s nothing wrong with keeping your credit limit low and manageable. If you don’t feel confident having a higher limit, requesting a decrease is okay. You don’t want to get into a situation where you’ve taken on more than you can handle and can’t access higher credit when needed.
After all, this is your financial health, and no bank or lender knows your situation better than you do. Use your best judgement and make your credit card limit work for you. That way, you’re more likely to get approved if and when you need to increase your credit limit.
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