The credit limit explained: what is it and should you change it?

Credit limits are one of the most important things to consider when it comes to credit cards.

In this article, we will discover:

What is a credit limit?

A credit limit is the maximum amount of debt you may have on your credit card. If your credit limit is $10,000, you cannot have more than $10,000 in credit card debt.

It is not uncommon for different credit cards to have different minimum and maximum credit limits. The minimum credit limit is often between $1,000 and $2,000, while some cards have a maximum of $100,000.

However, not all credit cards have a maximum. Indeed, there are dozens of cards on the market with no maximum limit, the majority being premium or rewards cards that encourage extra spending with incentives through rewards programs and benefits such as discounts on flights and groceries. In contrast, credit cards with lower limits are usually low-rate or low-fee cards.

According to the latest data from the Reserve Bank of Australia (RBA), the average credit card limit in Australia is around $9,800.

How is a credit limit established?

Although you may indicate a preference for your credit limit, your credit card provider will ultimately make the final decision. To calculate your credit limit, providers typically assess the following:

  • Income: A regular salary will make a good impression with credit grantors and increase your chances of obtaining a higher credit limit, especially if this income is quite high.

  • Use: Even a high income may not look good if you change jobs every six months or so, as credit grantors most often want to see job stability. People employed part-time, casually, or as entrepreneurs may find it harder to get a higher credit limit.

  • Credit history and current debt level: Having a low credit score and a handful of unpaid debts, such as missed payments on a car loan, will reduce your chances of receiving a high credit limit.

  • The credit card itself: As mentioned above, credit cards can have minimum and maximum credit limits. No matter how perfect you are (and we have no doubt you are), it’s not really possible to get a $50,000 limit on a credit card that has a $10,000 max limit. $.

Once the provider has set a credit limit to meet your request, they will detail it in the same letter they send with your card in the mail, along with other key terms and conditions. If you are not satisfied with this credit limit or wish to change the currently set limit, you may submit a request to your credit provider to have the limit changed. You may even consider switching to another credit card provider.



What happens if you go over your credit limit?

Sometimes life happens, which means it’s possible to go over your credit limit with certain cards. In this case, usually one of two things can happen:

  • New transactions will be declined, or

  • Fees may be charged.

For providers who do not charge fees, they will instead refuse any new transactions you have made over your agreed credit limit. While this isn’t necessarily a bad thing as it can prevent you from making unnecessary purchases, it can have significant consequences. For starters, this also happens to direct debits, such as gym membership fees, which can charge a fee themselves if you don’t pay on time.

If your provider charges a fee, it’s called an over-limit fee, which can be up to $34 each time. This is only true for credit cards taken out before 2012, as laws have since been passed to prevent new cards from charging fees above the limit.

Your credit card lender should contact you directly when you reach your credit limit and again when you exceed it.

Changing your credit limit

You can reduce or increase your credit limit at any time by contacting your credit provider. Credit grantors are not required to approve your application, as they must reassess your current income, employment, overall credit profile, and ability to make repayments. In the past, credit card providers offered credit limit increases to trusted customers, but this practice was abolished in mid-2018 to reinforce responsible lending standards.

There are many reasons why you might want to change your credit limit. Maybe you’re planning a big vacation abroad or buying a major appliance, but you don’t have time to save money. Or maybe you’re spending a little too much on your credit card each month and want to cut spending after you reach a certain point. In this case, you would be looking to reduce your credit limit.

You will need to submit a formal request to increase your credit limit. To increase your chances of being approved, have information about your income, employment, and expenses handy, as this may have changed since you last applied for the card. It may take a few days for your new credit limit to be processed.

Changing your credit limit can impact your credit score

Each time you request an increase in your credit limit, the lender will perform a credit check on your credit profile. Although a single check has little to no impact on your credit score, performing credit checks can often have a negative impact on your credit score, just as applying for too many loans or missing repayments can. To do.

The Australian Securities & Investments Commission (ASIC) implemented new laws from January 2019 to enforce responsible credit card lending, under which lenders must now assume a person’s ability to repay their debts over three years, instead of the previous five. This move has been backed by both consumer groups and major banks as a way to curb credit limit increases, but as a result, credit limit increase approval may be more difficult.

Additionally, comprehensive credit reports are now in place in Australia, which means information about your credit limits is now included in your credit profile. Although you may not be using your entire credit limit, future lenders could still reject your application if your combined limits are deemed too high or too risky. Ultimately, it’s important to think twice before requesting an increase in your credit card limit.

Why is your credit limit important?

Your credit limit matters because it’s basically how the lender declares you to be a trustworthy credit card user. A high credit limit means you are able to repay that amount – a lower limit less. Rather than boring you with the exhaustive details of what a higher credit limit can mean, we’ve instead compiled a handy list of pros and cons below:

Higher credit limit

  • You have instant access to more funds when you need them.

  • You can enjoy the interest-free days more.

  • You have more room to take advantage of rewards programs.

  • Higher limit cards are more likely to have attractive features like free travel insurance.

  • The more money you can borrow, the more debt you can take on.

  • It may be more difficult to get approved for additional lines of credit, such as car loans and home loans.

  • You can be rejected for raises, which hurts your credit score.

  • Higher limit or no limit cards are more likely to incur higher fees.

Having a lower credit limit, while being less flexible, means you can have greater discipline over your spending. This is especially useful for people who struggle with the temptation of credit cards, as they can be cut off after spending a relatively small amount.

Additionally, a higher credit limit can actually have a negative effect on your chances of getting a loan, such as getting a mortgage or a car loan. This is because lenders may view your credit limit as a potential debt, even if you are a responsible card user. A higher credit limit could see them offer you a less than favorable offer or turn you down completely.

The two cents from Savings.com.au

When it comes to your credit card, having the right credit limit is important. For one, if your credit limit is too low, you may run out of available credit to spend each month. On the other hand, if the credit limit is too high, you run the risk of spending too much and having an impact on your financial situation.

If you’re a responsible credit card user and have proven that you pay your balance on time and in full each month, a higher credit limit may work in your favor, especially if you have a rewards or rewards program. benefits that provide sufficient incentives to spend larger sums. If you’re struggling to pay off your credit card in a timely manner, asking to lower your credit limit may work in your favor as well.

Consider what type of consumer you are before deciding whether to increase or decrease your credit limit – your current credit limit may already be perfect, but this can still change over time.

Article first published on November 28, 2018 and updated on February 2, 2022.


Image by Karolina Grabowska via Pexels.

The whole market has not been taken into account in the selection of the above products. Instead, a reduced portion of the market was considered. Products from some vendors may not be available in all states. To be considered, the product and price must be clearly published on the product supplier’s website. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au and Performance Drive are part of the Savings Media group. In the interest of full disclosure, Savings Media Group is associated with Firstmac Group. To learn how Savings Media Group handles potential conflicts of interest, as well as how we are paid, please visit the website links at the bottom of this page.

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