You’ve just received the good news that your application for a new credit card has been approved. However, your excitement quickly turns to disappointment when you discover that the credit limit is too low to cover your intended purchase or to consolidate all your existing debts.
While the initial reaction might be to cancel the card in frustration, this guide will show you why that might not be the best idea and how to navigate this situation effectively. By following these steps, you can make the most out of your new credit card and avoid potential pitfalls.
Understanding Credit Limits
What Determines Your Credit Limit?
When you receive a new credit card, the issuer assigns a credit limit, which is the maximum amount you can borrow using that card. This limit varies widely depending on several factors, including your income, credit history, and the lender’s criteria. The average credit limit in the UK is between £3,000 and £4,000, but it can be as low as £200 or as high as £10,000 or more.
Key Factors Influencing Your Limit
- Income: Higher income generally leads to a higher credit limit.
- Credit History: A strong credit history with timely repayments can increase your limit.
- Outstanding Debts: The total amount of your existing debts affects your creditworthiness.
- Available Credit: The potential amount you could borrow from all your credit lines.
Dealing with a Low Credit Limit
A common issue is receiving a lower credit limit than expected. If the limit is too low to be useful, particularly for consolidating debts, there are steps you can take to improve the situation and manage your finances more effectively.
Strategies for Managing Low Credit Limits
Requesting a Higher Limit
If you’re dissatisfied with your initial credit limit, you can request an increase from the credit card company. While approval is not guaranteed, having the card for a few months and maintaining a good payment record can improve your chances. However, note that some balance transfer offers have strict timelines, so check if the increase will come in time to benefit from the promotional rates.
Timing Your Request
- Initial Review Period: Credit card issuers often review limits after three to six months of use.
- Promotional Offers: Balance transfer deals may require action within the first 60 to 90 days.
Using Multiple Cards
If one card does not offer sufficient credit for your needs, consider applying for an additional card. This can help you distribute your debt across multiple cards, even though it may slightly complicate your financial management and minimum repayments.
Benefits and Drawbacks
- Interest Savings: Moving part of your debt to a card with a lower interest rate can save money.
- Complexity: Managing multiple cards requires careful attention to avoid missed payments.
Maintaining Your Credit Score
The Impact of Multiple Applications
Applying for multiple credit cards in a short period can negatively affect your credit score. Each application results in a credit inquiry, which can slightly lower your score and reduce your chances of approval for future credit.
Mitigating the Damage
- Space Out Applications: Allow time between applications to minimize the impact on your credit score.
- Check Your Credit Report: Ensure there are no errors that could negatively affect your creditworthiness.
The Consequences of Cancelling a Card
While it might feel good to tell the bank where to stick it, cancelling your new card can have several negative repercussions on your credit score and future borrowing ability, such as lowering your credit utilization ratio and shortening your credit history.
Why Keeping the Card Can Be Beneficial
- Credit Utilization: Having available credit can positively impact your credit utilization ratio.
- Credit History Length: The length of your credit history is a factor in your credit score, and closing accounts can shorten it.
Practical Tips for Credit Management
Using Savings to Reduce Debt
Before applying for additional credit, consider using any available savings to pay down existing debts. This can reduce the amount of credit you need and improve your chances of receiving a higher limit in the future.
Evaluating Your Financial Situation
- Emergency Fund: Ensure you retain enough savings for emergencies.
- Debt Reduction: Use extra funds to lower high-interest debts first.
Making the Most of Your Credit
Even with a lower credit limit than desired, there are still ways to make the card work for you. Use the available credit wisely, making regular, on-time payments to build a stronger credit profile over time and potentially qualify for higher limits in the future.
