Credit Score Basics > How going over your credit limit affects your credit score

How going over your credit limit affects your credit score

How you use the credit available to you is one of the main things credit reference agencies like Experian look at when calculating your credit score. This is why, if you go over your credit limit, you’ll hurt your credit score almost immediately. Here’s how it works.

What is a credit limit?

A credit limit is the highest amount that you can borrow on a credit card. It's basically the most money you can have outstanding on a card at any one time.

Banks and other credit card providers need to ensure they're lending to you responsibly and that you can pay back what you borrow. So, they give you a credit limit based on what they think you can afford to repay.

This is why, as you grow your credit history and improve your credit score, you will usually see your credit limit increase. This can also further increase your credit score and show lenders that other providers see you as responsible.

How much of my credit card limit should I use?

According to Experian, the largest credit reference agency in the UK, you should not use more than 25% of your credit limit each month. This is also called "credit utilisation".

Here's an example of how credit utilisation is calculated:

• Let's say you have two credit cards. Your credit limit is £1,000 on one of them. On the other, £500. Your total credit limit is £1,500.
• You've already spent about £600 this month on both credit cards.
• Your credit utilisation is £600/£1,500 = 40%.
• Ideally, you would not use more than £375 (25%) each month.
• Pro tip: Spread this so it's not more than 30% of each card's limit. For example, you should aim to spend less than £150 on the small credit limit card and less than £300 on the larger one.

Credit utilisation matters because lenders want to see that you're only using a small portion of the credit that you have access to. If you do this, it shows that you don't need to borrow as much as you can – you don't live on credit.

This means that you have only three options to reduce your credit utilisation:

• Borrow less.
• Ask the credit card provider for a higher credit limit.
• Or get a new credit card.

Be careful if you apply for new credit, though—making too many applications can hurt your credit score. Lenders will see them as a sign that you suddenly need money that you can't get elsewhere.

What happens if I go over my credit limit?

About a third of your credit score is based on your credit utilisation percentage. This means that going over your credit limit will almost immediately hurt your credit score.

Going over your credit limit can hurt you in other ways as well:

• Your transaction could be declined.
• You might have to pay a penalty fee.
• Your credit card provider could raise your interest rate. This could hurt you even more as now you'll be making larger payments towards your interest rather than towards lowering your balance.
• Your credit limit might also be reduced, especially if you exceed it more than once.
• You might lose any promotional rates.
• In a worse-case scenario, you might even be asked to pay off the credit card so the provider can close your account.

Having maxed out credit card balances could also lead to your mortgage or loan applications being denied.

That's because the bank will be able to see how much of your credit limit you're currently using.

If your credit utilisation is too high, banks will think you already have more debt than you can handle. They will also look at how much of your monthly income you use to pay debts.

This ratio is called "debt-to-income"; a high one will often disqualify you from getting a mortgage.

How long will going over the limit show on my credit report?

Being over the limit should only affect your credit score as long as the balance is unpaid. Once you pay down the card, your score should recover as the credit card issuer reports the new balance to the credit reference agencies.

Does requesting a higher credit limit affect my credit score?

Increasing your credit limit could be a good way to ensure you can access the money you need without hurting your credit score.

In fact, having a higher credit limit will help you improve your credit score, as you'll have a lower credit utilisation ratio, which shows lenders that you're able to manage debt.

However, remember that your provider will perform a "hard check" on your credit report after receiving your application for a higher credit limit. These stay on your credit report for two years, and having even one of them can temporarily lower your credit score.

That's why, in most cases, the safest option for your credit score is to wait for the credit card provider to automatically increase your credit limit.

Also, if you do go ahead and ask for a credit limit increase, we recommend waiting at least six months after receiving your new credit card. Otherwise you’re sending lenders another signal that you have financial difficulties.

Does lowering my credit limit affect my credit score?

Surprisingly, yes. Having a lower credit limit can by itself signal that you are seen as riskier – even if it's something you requested yourself.

A lower credit limit will make it more likely you’ll go over it if you ever need emergency cash. And as we've seen, using most or all of your available credit will signal lenders that you are financially stretched and "living on credit".

The best solution is something in the middle: only a small number of credit cards, with a higher credit limit than what you need, and which you will only use for small purchases – not as a source of money until your next paycheck.

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