Credit limit too low?
DON’T just cancel the card
You’ve just received the good news: you’ve been approved for a new credit card. However, your excitement is short-lived when you realize the credit limit is insufficient for the purchase you intended, or it’s not enough to consolidate all your existing debts. Before you react by cutting up or canceling the card out of frustration, take a moment to consider the consequences. Such actions could negatively impact you more than the bank. Instead, follow this concise guide to navigate the situation effectively.
Consider the email below – it’s a common example of the messages we frequently encounter.
Hey there, I currently owe £3,000 on a credit card from Suntanner Bank. In an attempt to manage this debt more effectively, I applied for a balance transfer to Barstools Bank, which offers a 25-month 0% interest deal with a 2% fee.
I submitted my application online, specifying that I wanted to transfer my £3,000 balance interest-free. Although my application was approved, I was disappointed to receive a credit limit of only £1,500, which unfortunately prevents me from completing the transfer. Needless to say, I’ve decided not to proceed with their card under these conditions!
Of course it may feel good, but it’s actually biting off your nose to spite your face. Here’s a quick Q&A to take you through how it works, and what you can do. Note that this guide is for NEW cards. For dealing with old ones, see Cancel unused credit cards?
What is a credit limit?
When issued a new credit card, it arrives with a specified credit limit, delineating the maximum amount the lender is willing to extend on that card. Should you exceed this limit, expect to incur a fee of £12 for surpassing it.
In the United Kingdom, typical credit card limits range from £3,000 to £4,000, contingent upon your income level and credit history. Applicants with lower incomes or less favorable credit histories may receive initial limits starting at around £200, with caps typically reaching £1,500. Conversely, individuals with higher incomes and strong credit histories could secure limits exceeding £10,000.
If your assigned limit seems overly generous and poses a temptation, you have the option to request a reduction from the lender. Conversely, a common issue arises when the credit limit proves insufficient, particularly when attempting to transfer existing debt onto the card. This guide provides insights into managing such situations effectively.
Why do lenders give such low credit limits?
When applying for any financial product, each lender evaluates your application differently based on its own criteria for identifying profitable customers. It’s crucial to understand that their assessments primarily focus on profitability rather than just assessing risk.
Certainly, being perceived as a risky borrower can hinder your chances of being profitable. However, even if you present minimal risk, banks take into account various other factors, such as:
- Existing debts: The total amount you owe on other credit cards, loans, overdrafts, and similar financial obligations.
- Available credit: The total credit you could potentially utilize if needed, regardless of whether you are currently using it.
- Repayment history: Your track record of making timely repayments without any missed or late payments.
- Risk assessment strategies: Banks also attempt to identify and evaluate individuals they believe are exploiting the system.
All of these factors contribute to the lender’s decision-making process. It’s important to note that overall, credit scoring has become stricter, and credit limits have generally been reduced in recent times. This shift largely stems from heightened regulatory scrutiny on ‘responsible lending’. Paradoxically, what is deemed as ‘responsible lending’ can sometimes prevent certain individuals from efficiently managing their existing debts.
In summary, obtaining approval and favorable credit limits has become more challenging compared to previous years. For comprehensive guidance and strategies to enhance your creditworthiness, refer to our detailed Credit Scoring Guide.
Can I ask my lender to increase my credit limit?
If you find yourself dissatisfied, there’s no harm in notifying your credit card company and requesting a higher credit limit. However, it’s important to understand that approval is not guaranteed.
Typically, your chances of receiving a limit increase improve after you’ve held the card for a reasonable period, usually around three to six months into your ownership.
One complication is that certain 0% balance transfer offers necessitate transferring debt within the initial 60 to 90 days to qualify for the promotional rate, so delaying might make you ineligible. Always verify whether increasing your credit limit allows you to retain the advantageous rate after transferring debt.
If you’re seeking a higher limit to facilitate more borrowing, consider whether it’s truly necessary. If lenders are hesitant to extend credit, it may be a sign that additional borrowing could strain your finances.
Before pursuing any credit increase, consider utilizing any savings you have to reduce existing debts. This approach could lead to a lower required credit limit. Review resources like the Debts vs Savings guide to determine the best course of action for your situation.
What’s wrong with just cancelling the card?
It’s a bit like punching a brick wall. You’ll feel the pain more than it will. There are two reasons for this…
It’s already had an impact on your creditworthiness
Each time you apply for a new credit card, especially within a short period, it registers as an inquiry on your credit report. These inquiries typically have a slight adverse effect on your likelihood of being approved for new credit in the future.
Having an additional credit card means you have more credit available, which could potentially reduce your ability to secure additional credit lines. Even if you decide to cancel the card (through official channels, not simply cutting it up), this process takes time.
To put it more simply, your credit score has already taken a hit due to obtaining the card, and it won’t rebound magically if you don’t use it.
You’ll need to apply for a new one anyway
This process will require time, during which you may miss out on any benefits that could have accrued. Additionally, presumably, you chose the card because it suited your needs—so even if it serves a lesser purpose than expected, could it still serve a useful function?
Discarding the card means forfeiting a source of available credit, potentially diminishing your ability to access future credit at favorable terms. So while it can be satisfying to cut ties with the bank, sometimes you might find yourself at a disadvantage instead.
What should I do with the low limit card?
Certainly if you got it to shift debt to (do a balance transfer) and it’s cheaper than the cards you’ve currently got, shift the debt to it up to the maximum allowed.
Going back to the email that prompted this…
I submitted my application online, specifying my request for a £3,000 interest-free balance transfer and provided the card number as instructed. Although my application was approved, I was only granted a disappointing credit limit of £1,500, making it impossible to proceed with the transfer. I have since informed them of my decision regarding their card!
In this scenario, if your £3,000 debt is currently accumulating interest at a high rate of 22% annually, transferring at least half of it could save you more than £300 in interest over the next year. This initial saving is a promising start, and the benefits of reduced interest begin immediately.
Moreover, there’s no restriction that limits you to transferring balances to only one card. If you have additional debts to relocate, simply consider applying for another card. The downside might be managing two cards instead of one, which could increase complexity and impact your overall minimum repayments.
However, exercise caution against excessive borrowing. Always checking your credit reports prior to reapplying to ensure any low credit limit wasn’t erroneously influenced by them.
Explore our comprehensive credit card guides for our latest top recommendations and utilize our Credit Card Eligibility Calculator to identify cards that best suit your personal financial circumstances.