What is a credit limit?

Credit limits are the amount of money a person can borrow on a particular credit card. This is usually set by the credit card company, but it’s possible to both increase and reduce these limits.

Credit cards are ways of borrowing money on demand, which is one reason the interest rate tends to be higher than that of many other forms of borrowing. But while it’s possible to borrow money on demand and only pay interest for the sum borrowed, the account holder can’t simply borrow as much as they wish. There are limits set, both to protect the credit card provider against losses from bad debts and to protect the credit card user from the chance of default and serious damage to his or her credit rating.

Credit limits are how this borrowing is restricted. The credit limit, determined by the credit card company, is programmed into the card’s account and depends on a number of factors, including the applicant’s past payment patterns, salary, and credit rating. This credit limit is generally set at the time of application.

Many credit card providers will automatically increase credit limits if a card holder shows a good payment record, although after the credit crunch these automatic increases have become rarer.

It’s also possible for a card holder to increase his or her own credit limit. The best way to do this is to ring up the normal credit card helpline. The call operator who answers may have limited discretion to raise the rate, and the amount permitted will be dictated by the bank’s computer system. If the call operator has no discretionary amount or if the amount is too low, the card holder should ask to speak with either the supervisor or the customer retention officer.

If the credit limit cannot be increased further, another way to increase the amount that can be borrowed using credit cards is to apply for new credit cards. However, card holders should remember that the number of cards applied for can count against the credit rating, particularly if it’s done within a short space of time. Many card providers will advertise the credit limits they are prepared to advance to new borrowers, although this amount may be a maximum which is reduced according to the individual’s circumstance.