Does your credit card limit matter?

Credit limit

It might not seem like it, but your credit limit is one of the most important things to consider when it comes to credit cards.  

What is a credit limit?

The credit limit is the maximum amount of debt you can have on your credit card at any time and is determined when applying for a new card. If your credit limit is $10,000, then you cannot have more than $10,000 in debt on the card.

Different credit cards can have varying minimum and maximum credit limits. The minimum credit limit is often around $1,000-$2,000, while some cards have a maximum of $100,000!

But not every card has a maximum. Indeed, there are dozens of cards on the market with no maximum limit, the majority of which are ‘premium’ or rewards cards that encourage extra spending with attractive rewards programs and features. In contrast, credit cards with lower limits are typically ‘no frills’ low rate or low fee cards.

According to the latest data from the Reserve Bank of Australia (RBA) the average credit card limit in Australia is around $9,500.

How is a credit limit set?

Although you can indicate a preference for your credit limit, it’s ultimately your provider who will make the final decision, although they will take your request into account. To work out your credit limit, providers generally assess the following:

  • Your income: a regular salary will look good to credit providers and will increase your chances of a favourable credit rating. It works better if this income is high, too!
  • Your employment: a high income might still not look good if you jump around jobs every six months or so – they want to see some stability. People employed part-time, casually or as a contractor might also find it harder to get a higher credit limit.
  • Your credit history and current debt levels: having a low credit score and a handful of outstanding debts, such as missed payments on a car loan, will lower your chances of getting a good limit.
  • The card itself: as we said before, cards have minimum and sometimes maximum credit limits. No matter how perfect you are (and we don’t doubt that you are), it’s not really possible to get a $50,000 limit on a card with a $10,000 maximum limit.

Once the provider has settled on a credit limit for you, they’ll detail it in the same letter they send with your card in the mail, as well as the other important T’s and C’s you need to know. If you’re not satisfied with this credit limit or want to change what you currently have, you could submit a request for it to be raised (or lowered), or you could consider switching to another credit card. More on this later.

What happens when you exceed your credit limit?

It is possible to actually go over your credit limit with some cards, but it’s definitely better to not. Generally, one of two things can happen:

  • New transactions will be declined
  • You may be charged a fee

For the providers that don’t charge a fee, they will instead decline any new transactions you’ve made past your agreed credit limit. While this might not necessarily be a bad thing (it can stop you from making unnecessary purchases), it can have some pretty dire consequences. For starters, this happens to direct debits too, such as gym membership fees, which can charge a fee themselves if you don’t pay on time.

If your provider does charge a fee, this is called an over the limit fee, which can be as high as $34 each time. This is only true for credit cards that were contracted before 2012, as new laws were passed at this time preventing new cards from charging over the limit fees.

Your provider should contact you via SMS or email when you get close to your credit limit and again when you cross it.

Changing your credit limit – as simple as it sounds?

You can raise (or lower) your credit limit at any time by contacting your provider – they just don’t have to approve your request.

Credit card providers used to offer credit limit increases to reliable customers, but this practice was banned in mid-2018 to strengthen responsible lending standards.

But there are plenty of reasons why you might want to change your credit limit. Maybe you keep going over your limit and feel your current credit limit isn’t enough to meet your requirements. Or maybe you’re spending too much on your credit card each month, and want to cut yourself off from spending after reaching a certain point. In this case, you’d seek to lower your credit rating.

You’ll have to submit a formal application to increase your credit limit. To increase your chances of being approved, have your income, employment and expenses information at the ready, as this may have changed since you last applied for the card. it may take a few days for your new credit limit to be processed.

Changing your credit limit can impact your credit score

Every time you apply for a credit limit change, the provider will do a credit enquiry into your credit file (did we say credit enough?). While one of these alone has little to no impact on your credit score, having it done too often can negatively affect your credit score, just as applying for too many loans or missing repayments can. According to Credit Savvy, having multiple enquiries made on your credit file can reduce your credit score by as much as 200 points, which is a lot.

ASIC also recently implemented new rules to enforce responsible credit card lending, whereby providers now have to assume a person’s ability to repay debts over three years, while the old rules required it over five years. This move has been backed by both consumer groups and big banks as a way to curb credit limit increases, but as a result, you may find it harder to get your credit limit increase approved. These new regulations will be enforced on 1 January 2019.

Furthermore, comprehensive credit reporting is now in place in Australia, meaning information about your credit limit(s) are now included in your credit file. Although you might not be using the entirety of your credit limit, future lenders might still knock your application back if they deem your combined limits to be too high. So think twice before applying for an increase.

So why does your credit limit matter?

Your credit limit matters because it’s essentially the bank’s way of saying you’re a trustworthy credit card user. A high credit limit means you’re trusted with being able to repay that amount – a lower limit less so. Rather than bore you with the exhaustive details of what a higher credit limit can mean, we’ve instead compiled a handy pros and cons list below:

Pros

Cons

Higher credit limit
  • You instantly have access to more funds when you need them
  • You can take advantage of interest-free days more
  • You have more room to take advantage of rewards programs – sometimes a couple of thousand a month isn’t enough to get the full benefit
  • Higher limit cards are more likely to have attractive features like travel insurance
  • The more money you can borrow, the more debt you can accrue
  • It can make it harder to get approved for loans
  • You can be rejected for increases, harming your credit score
  • Higher or no limit cards are more likely to come with higher fees

Having a lower credit limit, while being less flexible, means you can have greater discipline over your spending. This is particularly useful for people who struggle with the temptation of credit cards, as they can be cut off after spending a relatively low amount.

Furthermore, a higher credit limit can actually have a negative effect on your chances of getting a loan, such as a mortgage or a car loan. This is because lenders might view your credit limit as potential debt, even if you’re a responsible card user. A higher credit limit could see them offer you a less than favourable deal or refuse you altogether.

Savings.com.au’s two cents

It’s important to have the right credit limit on your credit card. If your credit limit is too little you can run out of available spend each month, and if it’s too big you run the risk of overspending. If you’re a responsible credit card user with a proven history of paying off your balance on time and in full every month, then having a higher credit limit can work in your favour, especially if you’ve got a rewards program that gives better value for spending higher amounts.

But if you’re struggling to pay off your credit card in time, requesting a credit limit decrease can work in your favour too. Just think about the kind of spender you are – it might be that your current credit limit is perfect already, but that can still change over time.

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