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21 Aug 2020

Barclaycard apologises for setting wrong credit card limits - is yours too high?

Find out what effect your credit limit can have on your credit score
woman on laptop making card payment

Some Barclaycard customers may have received, or will soon get, letters apologising for setting their credit card limit too high - but what effect could this have on your finances?

Barclaycard told Which? the issue only affects a small minority of its customers (it won't say precisely how many) and it is in the process of contacting everyone involved.

Although being granted a high credit limit might sound appealing, it could leave you in debt trouble if you spend more than you can afford to pay back and could impact your ability to borrow in the future.

Here, Which? explains how credit card providers decide on your limit, how your credit card limit can impact your credit score and what to do if you think your limit has been set too high.

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Why is Barclaycard reviewing some credit card limits?

When we asked Barclaycard why it decided to review its customers' credit card limits in the first place, it told us it does this regularly as a matter of course.

As part of this review, the credit card provider said there were a small number of instances where it had failed to take a customer's full circumstances and/or financial situation into account, and a higher limit was set in error.

Barclaycard confirmed the system has now been fixed, so this issue shouldn't happen again.

Any customer who feels they have been adversely affected by being given a higher credit limit than they should have - be that incurring losses or having other negative effects on their circumstances - are being advised to contact Barclaycard, where help is being assessed on a case-by-case basis.

How do providers set your credit card limit?

Your credit limit is the maximum amount of money you can owe on one particular credit card at any one time.

Credit card limits vary between providers, depending on how they view your personal circumstances. When you apply for a credit card, the provider will set your limit depending on:

  • Your credit history: if your credit history shows you're a reliable borrower you're likely to get a higher limit than those with past missed payments, arrears or CCJs. You can also be at a disadvantage if you've never borrowed money before, as a lender can't tell whether you can be trusted to pay the money back.
  • Your cashflow: in the application, you'll likely have to detail how much money you have left over each month after paying things such as your rent or mortgage, household bills and food; the more money you have to repay a prospective credit card, the higher the credit limit you'll receive.
  • Other borrowing: any money you owe on mortgages, personal loans, arranged overdrafts and other credit cards will be taken into consideration, as well as the credit limit that's already been granted on other credit cards.
  • The provider's lending policy: some credit card providers are more risk-averse than others, so what you'll be offered can vary. What's more, different credit card deals also come with varying credit limit offers.

Credit card providers can choose to increase or decrease the credit limit, usually depending on how you manage the card.

Those who successfully use a lot of their credit limit and pay off the debt on time are more likely to get their credit limit increased, whereas credit card providers are more likely to reduce the limits of those who miss payments or simply don't use much of their available limit.

credit cards on table

How does your credit limit impact your credit score?

Having a large credit limit won't necessarily have a negative impact on your finances or your credit score - it all depends on how you use it, and what it suggests to lenders.

We spoke to James Jones from credit reference agency Experian, who outlined some of the key indicative score factors for credit cards.

'The worst-case scenario is being in a situation where you've used the whole credit limit, and you're unable to keep up with the minimum monthly repayments,' says James. 'But if you have a low balance and a low credit utilisation, that would gain credit score points.'

Missing just one repayment could result in 130 points being deducted from your credit score; this increases to a loss of 350 points if the account is defaulted and transferred to collections - which could put off future lenders.

Your balance, credit card limit and amount of time you've had the card can also have an effect. James says having a balance of less than £50 could bring 60 extra points on your credit score, while a balance of more than £15,000 would reduce it by 50 points.

A credit limit of £5,000 or more adds on 20 points, but being granted a limit of £250 or less would reduce your score by 40 points.

You could get an extra 20 points if you've had the same credit card for more than five years, but you'll be docked 40 points if you've opened a new credit card account in the past six months.

According to James, one of the best ways to use your credit card to improve your credit score would be to have the same card for five years, which has consistently maintained a low balance and a high credit limit, with a perfect payment record.

Having this on your file could boost your credit score by up to 200 points, which could boost your description as a borrower from 'fair' to 'excellent'.

How much of your limit should you spend?

If you want to use your credit card to boost your credit score, it's good practice to use around 25% of your credit limit each month.

This amount will demonstrate to lenders that you can be trusted to borrow and repay money, without being overly reliant on it and spending beyond your means.

If you're currently using a larger percentage of your credit limit each month and can afford to have your credit limit increased, then a larger limit could actually benefit your credit score in this instance.

James says that using less than 30% of your credit limit would result in an extra 90 points added to your credit score - a fairly significant amount. However, if you use more than 90% of your limit, you could see a reduction of 50 points.

What are the rules on automatic credit limit increases?

Some credit card providers will reward 'good' borrowers with a higher credit limit, perhaps after a customer has proven to be reliable in repaying and managing the money they borrow.

However, you may not be asked whether you want the increase, and not all providers will tell you about it ahead of time - sometimes you'll just be notified about your new balance after the change has been made.

While this change is usually an incentive to get you to stay with a credit card provider, you don't have to accept an automatic credit limit increase. You'll have a 30-day notice period from the date the credit limit was changed to reject it by contacting your provider. You can also request to have the credit limit lowered.

Under Financial Conduct Authority (FCA) rules, anyone with persistent debt - that is if you've had to pay more in interest and charges than what's on the balance of your credit card - for the past 12 months should not be offered credit limit increases.