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What is a credit limit?

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Last editedNov 20203 min read

Like it or not, at one point or another, every business has to borrow money to stay afloat. Whether that’s something small like a pay day loan to see you through, or something much larger like a business loan, your credit limit will determine just how much funding you can secure.

Credit limit meaning

Your credit limit is the absolute maximum amount you can borrow from a lender. You should be able to borrow anything below this limit without much trouble, but you will not be able to borrow more.

How is your credit limit determined?

The better your credit score is, the higher your credit limit will be. You credit score considers all of the following criteria:

  • Your income

  • Your history of debt

  • Your history of repayments, particularly those which were late

  • Credit limits you have on cards you already own

  • Company policy

Your credit score, and therefore credit limit, will be lower if you have debt, or if you have a habit of not paying off your debts within a reasonable timeframe. You can still get a business loan on a low credit limit, so a poor credit score doesn’t make it impossible to fund your ventures, but it’s not the most favourable option.

What should be my credit limit?

A good credit limit varies from person to person. An ideal credit limit is one that accommodates your spending needs while still being an amount you can comfortably repay. The benefit of a credit card is that it gives you access to funds you may not have to hand at the point of purchase, but you still need to have them by the time the debt needs to be paid. Generally, you should try not to spend more than 25-30% of your credit limit to give yourself the security of knowing you can repay it.

Does a higher credit limit help?

Yes, and no. Sometimes you may get a call from your bank or lender saying they will be happy to increase your credit limit, or you can request this yourself. Provided you have paid your debts on time and have no debts elsewhere, they might raise your credit limit. It may be a good idea to agree to this, even if you never plan to borrow such a high amount of money.

A high credit limit is a sign that your lender trusts you to repay your debts on time and you have proven yourself to be less of a risk of bad debt. Other lenders will take notice of this, and it may help you secure larger amounts in the future. 

However, a high credit limit can also be a slippery slope. The more you borrow, the more you have to repay and if you fail to make those payments, you’ll only end up damaging your credit score. Do not think a higher limit is an invitation to spend ‘free money’ – every penny you borrow will need to be repaid. So, does a higher credit limit help? Yes, but only if you can pay off your debts.

How can I improve my credit limit?

Always pay your debts on time. This is the be-all and end-all for lenders. Can they trust you to repay what they lend you? If yes, you will get much more flexibility with your credit limit. If not, you may be offered much smaller amounts.

Try the following to make sure you always stay on top of your debt:

  • Pay your debts in total every month

When you set up a new credit card, companies will often give you the option to pay a certain amount or even a minimum amount. You should always opt for the third option – to pay off your debt in full. Continuous, timely, full payments mean a better credit limit.

  • Pay debts by Direct Debit where possible

A Direct Debit will help ensure you never miss a payment, as they are taken automatically. You should also take a close look at what direct debits and standing payments you already have, as you may be able to make better savings by consolidating some of them, i.e., dual fuel energy or mobile and internet providers.

  • Use spending alerts

Many banks and card companies allow you to set up spending alerts to let you know when you have reached a certain spending threshold each month. This is a fantastic way to ensure you never spend more than you can afford to repay, so you can set your alert for when a certain percentage of your credit limit is met.

  • Budget

Apps and email alerts are great tools, but in the end, it all comes down to budgeting. Make sure you know what funds you have coming in, what expenses need to be paid, and what you are left with. There is a big difference between ‘need’ and ‘want’ so your priorities need to be aligned. Ideally, all the ‘need’ expenses (energy, internet, mortgage etc.) will be taken by Direct Debit so you eliminate the possibility of late or forgotten payments.

  • Save

Savings are always important and if you have a solid saving plan in place, then you may even be able to take advantage of your full credit limit every now and again. For example, if you need to buy new equipment, it is always safer to do this on a credit card as you have added protection against fraud and the option to start a chargeback or take advantage of other benefits. Your spend may cost far more than you can afford based on income alone, but so long as you have the savings to make up the difference, you can securely make the purchase and pay it off on time.

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