Ever had your credit card limit raised or decreased without any explanation? It happens more often than you might think, so here’s a quick guide to how your credit limit is calculated, and what your rights are when it changes.
How is my credit limit calculated?
Your credit limit will be decided by a combination of factors, and like when being approved for a loan, the emphasis on each will differ from lender to lender. However, most providers are likely to look closely at your spending power, as this allows them to determine how much you can afford to borrow.
This doesn't necessarily mean that, if you earn a higher-than-average wage, you'll be given a higher-than-average credit limit as you may have a large percentage of your earnings taken up with existing outgoings such as a mortgage or the repayment of existing debts.
They'll also factor in your credit profile, using a credit rating agency, and may well take into account any previous custom you have had with them. Both of these factors will give the lender an idea about your previous relationship with debt and whether or not you are likely to be a profitable customer if given credit.
Don't forget, if you are rejected or given a relatively small credit limit, this isn't always necessarily because you are thought of as a high risk. If, for example, you have a limited history or no history at all of borrowing, the lender may choose to restrict the line of credit available to you at first.
Why has my limit been brought down?
There could be several reasons for this. One could be if you use the card irregularly – aside from the fact that a dormant card isn't making your provider any money (in fact it's costing them more to maintain this line of credit), it may also be seen as a bigger fraud risk.
Many people also don’t realise that missing a minimum payment doesn’t just mean a nasty fee and a mark on your credit file. It could also see any preferential rates or bonuses stripped, and gives your lender the opportunity to review your debt and potentially downsize your credit limit – so it’s really worth making sure you meet the minimum.
For more on this, see my recent blog on lenders’ harsh credit limit cuts.
Why has my limit been increased?
If you find you have been offered an increase in your limit without asking for it, don't be fooled into thinking of it as free cash – remember that the underlying thinking for lenders is almost always to make money.
So if you have found your limit increased, this is likely to be for three reasons:
1. You are regularly nearing your existing limit – demonstrating that you may use the additional borrowing
2. The provider is satisfied that the risk of lending you more money is sufficiently low – in other words, you'll be able to pay it back if necessary
3. The provider can make a bigger profit by offering you more credit
Remember, the more you borrow, the higher the chance that you won't be able to pay your bill in full every month and the more it costs you in interest – this is how credit providers make their money.
But things are changing...
For several years, credit card companies have been able to increase customers’ limits without any prior warning – allowing them to rack up additional debt when they haven't even asked for it.
Around 8 per cent of customers experienced this in 2009, according to figures from the UK Cards Association. However, that is now changing – by the end of the year, issuers will have to have procedures in place allowing consumers to reduce or reject any increase in their credit limit at any time.
As part of these measures agreed between the industry and the government, customers will also be able to prevent their provider from increasing their limit at any point in the future. For more information on these changes, see our guide to credit card customers’ new rights.
Think you’ve been treated unfairly?
If you do feel that you’ve been treated unfairly, it’s important to tell your lender right away, and make a formal complaint if necessary. Your lender has a legal responsibility to try to help you if you are falling into debt difficulty, so if any limit cut puts you at risk, then you have every right to complain to your bank. If you are unsatisfied with the response to this, the next step is to take it to the Financial Ombudsman Service.
If you can prove that the decision has been reached following an error – for example, if a missed payment was the bank’s fault and not yours – then remember to make sure that you not only have your limit restored (if you want it) but that the damaging mark is also removed from your credit file.
Follow the link for more information about fixing errors on your credit file.
