Credit card limits explained

What stops you from buying anything and everything with your credit card? Besides your self-control, which may come and go (especially around birthdays and holidays), it’s called a credit card limit.

So, in this guide, we’ll explain how these limits are calculated, whether they can be increased, and how it might affect your spending.

What is a credit card limit?

Your credit card limit refers to the total amount of debt your card can accrue at any one time. This means you may not be allowed to owe more than this limit, either from one big purchase or multiple purchases that build up over time.

For example, say you have a limit of $8,000. You’ll be able to use your credit card until you reach this limit, provided you make the minimum monthly payments and pay any extra fees or charges that are incurred. If you already have an outstanding balance of $8,000 and try to use your credit card again, it will likely be declined.

Sometimes you can go over the limit if you’re fairly close and a transaction is large enough to carry you over the line. It is at your banks discretion to allow the payment to go through and your bank will likely charge you an over the limit fee. Going over your limit can also negatively affect your credit score.

Our advice? Focus on applying for a credit limit that will suit your lifestyle and budget rather than just going for the highest limit. Do some budgeting, review your expenses against your income, and don’t feel like you need to apply for anything greater than you need.

Credit card limits prevent users from spending money that they’ll never be able to repay. After all, no shopping spree or holiday is worth getting leveraged to the hilt!

Some credit cards are advertised as having a maximum and minimum limit. When you apply, your limit will fit inside that range, based on your lender’s assessment of how much credit you should have access to.

How is your credit card limit calculated?

When you apply for a credit card, you apply for a certain limit of your choosing, up to the maximum limit (if one is advertised – many banks provide maximum limits upon application). You need to be able to prove this limit can be repaid, which is why you often need to provide proof of income.

The bank then determines how much your credit card’s limit will be, which could be equal to or lower than what you asked for.

It’s entirely possible that two people earning the same amount of money and applying for the same card will receive different credit limits, based on their financial history. Financial institutions will use the following info in their calculations:

  • Your credit score. Also known as a credit rating, your credit score is an indication of your ability to pay off debt. Having lots of debt, using ‘buy now pay later’ services, or failing to make repayments can lower your score, while paying off debt and making payments on time improves it.
  • Income. Your annual income is a crucial part of determining your credit card’s limit. Typically, the bigger your salary, the higher your credit limit can be.
  • Employment type. Whether you’re employed on a permanent, casual or contract basis, this may affect your ability to access more credit. This also includes whether you work full-time or part-time hours.
  • History with the institution. If you’re already an existing customer with a bank or credit card provider, this may work in your favour if you have a good history with them. On the other hand, if you have a bad history, they may be dubious about approving a higher credit limit.
  • The credit card you apply for. Different types of credit cards generally come with various credit limits, depending on their features, how they’re designed to be used and the customers they cater for. For example, black credit cards have greater credit limits (and comparable fees or interest rates) for high-income earners. Low-interest cards, meanwhile, typically have lower limits for everyday spending.
  • Assets. If worst comes to worst, and you were unable to pay back your credit card debt, you may have equity in your home, car or another asset that could be sold off to help pay back the debt.

The specific calculations used by banks and credit card providers can differ, so you might find that you will be approved for different amounts if you apply to different banks.

close up of man using credit card on his laptop

Want to know what your minimum credit card payments could be, or how long it might take to pay off a credit card? Use our credit card repayment calculator.

Changing your credit card limit

Once you have your credit card, you can apply to change your limit. Depending on your needs, you can ask your bank to increase or decrease your credit card limit. Increasing your credit limit means you can spend more with your card, provided you pay your minimum payments and fees, whereas a decrease can make your credit limit easier to manage.

Keep in mind when applying for an increase you will need to go through the approval process again to prove you can afford it.

Why would I want to reduce my credit card limit?

Reducing your credit card limit can help you avoid falling into a debt trap. It removes the ability to overspend and can be an effective budgeting tool. It may also improve your credit score, which can come in handy if you want to apply for a personal loan or home loan.

If you’re having difficulty paying off a credit card, you might want to consider a balance transfer card which typically has low, or even zero, interest rates for set periods to help you pay off your debt.

Frequently asked questions

Do all credit cards have a limit?

All credit cards do have a credit card limit, though there are high limit credit cards that do allow you to have a larger balance. These cards are typically quite exclusive and require you to have a large pay-packet to apply.

High limit credit cards often have higher interest rates and large annual fees. Beyond having no maximum credit limit, you can benefit from a few other perks, including:

  • concierge services;
  • free travel insurance;
  • complimentary access to airport lounges;
  • additional reward points; or
  • insurance cover and extended warranty on new purchases.

You may come across charge cards advertised as having no spending limit. Charge cards differ from credit cards in that you must pay off your balance in full every month before you can use it again, whereas credit cards only require you to pay a minimum monthly payment.

What do I need to apply for a high-limit credit card?

To apply for a credit card with a large credit limit, you’ll generally need a sizable paycheck in a permanent or long-term role and a favourable credit score, so the card provider can be confident in your ability to handle greater amounts of debt.

The application process for high-limit credit cards is exactly the same as for any other credit card – but the financial institution needs to be confident you’re able to handle higher levels of debt. As such, they might ask for a bit more information about your finances and income.

Does a minimum credit limit mean I need to spend a minimum amount?

No, a minimum credit card limit refers to the minimum balance you can apply for. You can’t apply for a credit card with a limit lower than the minimum amount listed.

For example, if a bank advertised a card with a minimum credit limit of $500, you can’t receive a credit limit of $400. Your card’s limit has to be equal to or over the minimum.

Once your credit card application is approved, you can spend as little or as much as you like, given you don’t max out your card or miss an essential payment.

If I change my credit card limit, will it affect my credit score?

Yes, changing your credit card limit can impact your credit score. Decreasing your limit may improve your credit rating, and applying for too many increases can harm it in the same way that applying for multiple loans negatively impacts your credit score.

Some banks will require that you’ve held your credit card for a minimum period of time before you can apply to increase your credit limit, and you may only be able to do this a few times each year.

Can I transfer my credit card limit to a new card?

If you’re struggling with repayments, you do have the option of moving your remaining balance to a balance transfer card with lower interest rates. Balance transfer cards will allow you to transfer either the full owing balance or a percentage of your new card limit (to leave you with a small amount for new purchases).

For example, if the card you would like to transfer to has an 80% balance transfer limit and you had $8,000 in debt that you wanted to transfer, you will need to apply for the new card with a credit limit of at least $10,000. After the balance transfer is complete, you would still have $2,000 available to make new purchases on the card. But be aware, that these new purchases will not be covered under your Balance Transfer offer and you will likely pay interest on these.

Should the new card you choose not have any percentage limit for balance transfers, you would be able to apply for the new card with a limit of $8000. However, this means there would be no available funds on the card to use until you paid down the debt.

Keep in mind that balance transfer cards are designed to help you manage existing debt, and won’t cure a spending problem. As such, you’ll typically be charged additional interest at a greater rate on new purchases than on balance transfer repayments.

Will I be charged for going over my credit card limit?

For credit cards opened before 1 July 2012, you’ll typically be charged an over-the-limit fee when you exceed your credit card limit. If you opened your card after this date, you won’t pay a fee due to Federal Government changes to the National Consumer Credit Protection Amendment Regulation. The change occurred to help credit cardholders avoid an effective ‘debt on debt’ charge.1

Instead, your card will decline transactions until you make enough payments to get your balance back under your maximum limit.

What else to consider when comparing credit cards

It’s essential to compare all aspects of a credit card when deciding which one you want to apply for, not just which has the highest credit limit. You should also take into account the following:

  • Interest rates: if you don’t pay off your card in full every month, you’ll be charged interest on the outstanding balance. Interest rates differ between credit cards based on their type and the financial institution you go with. Finding a card with a lower interest rate could help you save money;
  • Fees: credit cards can be subject to a number of fees. Some are unavoidable, like annual fees, while others are based on what you do with your card, such as making a transaction in a foreign currency. Some cards may waive annual fees or have low fees; and
  • Perks and features: some cards offer rewards programs (e.g. Velocity points, Qantas Frequent Flyer points) to reward you for spending. They may have other deals, like being interest-free for a set time period, or come with perks like complimentary travel insurance and airport lounge access. Typically, the more benefits the card has, the greater its interest rate and fees can be.

Want to save time when comparing cards? Our free credit card comparison tool compares a number of these products in seconds; letting you weigh up rewards, interest rates, fees and other features with ease.

It pays to compare!

Sources

1 National Consumer Credit Protection Amendment Regulation 12012 (No. 1): Explanatory Statement. Federal Register of Legislation, Australian Government. 2012.

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