Credit limits for credit cards explained

Have you ever had the credit limit on your card increased or decreased seemingly at random. Perhaps you’ve made a payment against your card and then find that your limit has gone down. Maybe you’ve received a new statement that shows an increase in your credit limit. Credit limits for credit cards are calculated using a variety of different methods. We’ll take a look at the most common ones so you can work out what you’re card provider is doing.
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How is the limit calculated?

A combination of factors are used to determine your credit limit but the most important is your spending power. This allows card providers to determine how much you can pay back so if you’re an average earner with a below average amount of debt, you’re likely to get an above average level of credit. The opposite is true of high earners who have a large portion of their wages already committed in loan repayments.

Why a limit is reduced

The most common reason a credit limit is reduce is because of a change on your credit score. If you have to refinance a loan because you can no longer maintain it, your lender will make a note against your credit file. This sort of thing make other lenders worried so they’ll tend to reduce your spending power with them or they may increase your card’s APR. Card irregularities could also cause your limit to drop, and missing a minimum payment could set off alarm bells with lenders who may react by lowering your limit.

Why a limit is increased

If your card limit is increased seemingly for no reason, it could be that you’re near your limit and they want you to keep spending. Alternatively, the lender could see you as a low risk card holder who they want to get more custom out of. The more credit you take, the more money the lender will make from you.

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