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How Credit Limits Work & How Lenders Assess Them

How Credit Limits Work & How Lenders Assess Them

How Do Credit Limits Work?

Credit cards can be confusing at the best of times, and let’s face it – some banks/lenders certainly enjoy casting out similar terms such as ‘credit score” and ‘credit limit’. But – what does it all mean? If you’ve never owned or used a credit card before, it’s important to understand what you’re working with. 

Credit limits, in particular, exist to protect your usage over time. This limit may depend on your credit history and your current income – and ultimately, it’s a tool to help prevent you from going into unmanageable debt. Let’s take a look at how credit limits work in practice, and why they’re important to pay attention to. 

a blonde girl checking her credit limits online

What Are Credit Limits?

Simply put, your credit limit is the exact amount that you are permitted to charge to your credit card, up to a certain point. 

Your credit limit will depend on how much your lender decided it could be when you created the account or filed your application. 

It is also important to note that it’s not just the purchases you make on the card that will count towards the credit limit. It’s also transfers, interest fees, charges, and so on. This may vary from issuer to issuer, so make sure you read the fine print. 

Credit limits can cause some of us headaches over time, mainly because they can sometimes get in the way of our borrowing if we’re not careful. In which case, it’s crucial to get to know how your credit limit actually works. 

How Do Credit Limits Work?

Say you were lucky enough to have a credit card with a 0% interest and cashback offers. Your bank’s credit limit is £2,000, and your current balance is £1,600. This means that you can still use what is left from the balance, i.e., £400.  

If you try to exceed that balance, then the payment will most likely be declined. Once you reach the £2,000 balance, your lender will notify you that you have exhausted your credit limit.  

You will then need to pay your balance back, in order to be able to use your card again.  

That is why it is vital to remain aware of your credit card limit, your current balance, and your lender’s specific terms.  

Thankfully, card issuers and lenders have made it easier and easier for borrowers to keep track of their limits and balances at any time. For example, you may have an app on your phone that lets you set notifications for when you come within a certain margin of your limit. It’s worth looking into these options when you first get started with your card. 

How Do Lenders Decide Your Credit Limit?

As you may have noticed, your credit limit could be far different to that of those around you, and rest assured, that is completely normal. We all have different limits, and word to the wise – it’s not healthy to compare! 

Your lender will decide your credit limit based on your creditworthiness when you open the account. This means that they will look at your credit score and will most likely take into account your current income, the current balance in your account, and payment history. Your credit score is determined by all kinds of factors – even how late you pay utility bills and council tax, and whether or not you’ve had any court judgements. 

Essentially, the lower you keep your balance, the more you have saved over time, and the more your history shows that you pay bills on time, the more likely you are to get a higher credit limit. You can use services such as Experian, for example, to see what affects your score and why. 

Naturally, the bigger your balance, and the later you have been with your payments, the less likely you are to have a larger credit limit.  

What Exactly Is Credit Utilisation?

If you have a credit card or are considering getting one, then the chances are that you have already heard the term ‘credit utilisation‘. This refers to the debt-to-credit ratio that you currently have in play.  

Simply put, your credit utilisation is the number of balances that you currently have, divided by the credit that you have across all accounts set up. 

As you can imagine, having a lower credit utilisation usually means having a higher credit score. It’s worth keeping in mind! 

When Does Your Credit Card Limit Reset?

While some people assume that your credit limit resets every month, that isn’t technically true. Your credit limit resets every time you make a payment to your credit card account, which has been accepted by the bank or lender.  

Once you have paid your outstanding balance down, your lender will allow you to use your credit card again.  

However, it is essential to remember that in some cases, your bank may even allow you to go over your credit limit. However, these are very rare instances that will need to be checked, and your lender will need to approve them first.  

a woman working out how lenders assess her credit limit

Can I Increase My Credit Limit?

The only way to know if you can increase your credit limit is simply by speaking directly with your bank or lender! Sometimes, just a call will do for them to give you a definitive answer, but in other cases, the lender may ask you to go to your branch to discuss the potential increase further.  

Generally speaking, if your credit score has improved since you first opened the account, many banks and lenders will consider this to be favourable and could very well increase your credit limit.  

Another reason for your lender to increase your credit limit would be if your income increases. There are various ways to get your limits moving in the right direction! 


As you can see, credit limits are not too complicated to understand. Once you know exactly what your own credit limit is and what is expected of your own balance payments, you will be able to manage your own account far more confidently and safely. Just make sure you know your boundaries – literally! 

As of today – there’s around 60 million active credit cards in the UK, with this number continuously growing. Many people turn to credit cards over other loan options due to how accessible they are (even with bad credit). However, this might not always be the best option for them.

In some cases a payday loan can work out better for you – just make sure you do your research on what best fits your circumstances. If you’re looking to apply now – LoanBird can have an answer for you in a couple of minutes!

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