How to avoid hitting your credit limit

Credit can be a useful tool provided you use it responsibly. If you don’t keep track of your spending, you may reach your credit limit well before you expect it.

We consider how credit limits are calculated, and how to manage your credit so you stay within your budget.

Tip: Find out how to streamline your online shopping and build your credit score at the same time.

What is a credit limit?

A credit limit refers to the maximum amount of money you can run up on your credit facility. The limit set by your credit provider depends on the amount you can afford to repay, and your previous credit behaviour, which is recorded by the credit bureaus.

If your credit limit is too high, it may be detrimental to your financial position and risk profile, says Ashay Ramnarain, credit head at FNB Credit Card.

“Your disposable income – as determined by your credit provider – must always be enough to cover the minimum instalment required for your specific product. This income must also cover at least 5% of the limit,” he says.

Tshipi Alexander, head of card issuing at Absa Everyday Banking, describes a credit limit as an amount of funding a credit provider avails to a customer.

“There are different options, such as revolving products based on usage; personal loans, where you start at a certain amount and pay it down over a three- to five-year period; and credit cards,” he says.

“The latter is a transactional product with rewards and benefits, such as interest-free periods. The amount approved for use will fluctuate, depending on affordability, usage, and the rate you pay down.”

Alexander advises customers to adhere to a budget, and to remain well within the limit. It’s best to avoid the upper end of the limit, in order to keep funds available should an emergency arise.

When making purchases, you can also select a longer payment period by making use of your budget facility. This will assist you to stay well below your credit limit.

Changing your credit limit

Your credit limit may change over time, depending on several variables.

For example, your credit limit may be eligible to increase when you show improved credit behaviour, such as paying debt on time or not taking on too much debt elsewhere. An increase in earnings or decrease in expenses may also qualify you.

Ramnarain says you can apply for a limit increase via your banking app, your online banking profile, or the bank’s call centre. The same applies to a credit limit decrease.

“You can voluntarily elect for a decrease, or your credit provider may decide to do this if you don’t manage your credit responsibly. Some credit products are designed to reduce time limits, such as shorter-term overdrafts,” Ramnarain explains.

Alexander adds that missed repayments may indicate a level of financial distress, which could impact the limit a credit provider is willing to extend.

“A credit limit can potentially be decreased, although this doesn’t happen that often,” he says.

“The first thing banks focus on is to ensure the credit we grant is responsible. If, for instance, there’s a change in your circumstances and your finances have taken a knock, it may not be the best thing to grant credit, and it can potentially be decreased.”

Exceeding your credit limit

If you exceed your credit limit, your credit provider will likely expect the excess amount to be settled immediately, together with the minimum instalment.

This is because credit providers try to safeguard customers against over-indebtedness and charges or interest that will push them over their limit.

“FNB makes customers’ balances readily available across multiple platforms, such as their online profile, ATMs, and the FNB app. Customers should budget their expenses appropriately and regularly check their credit balances,” Ramnarain says.

When a credit card holder makes a payment, they can dip into their available balance once again – a good reason to pay in full and on time and not have overdue payments.

“It gives you a buffer as you pay your limit down,” says Alexander.

Important credit behaviours

Ramnarain and Alexander agree that credit can be a helpful tool, but it has to be managed responsibly. To this end, they offer the following tips.

• Use the right credit type for the purpose; for example, use home finance if you buy a home.
• Avoid using credit to sustain your lifestyle. Instead, save up and pay in cash.
• Don’t take on unnecessary credit, even if it’s offered to you.
• Set your debit order dates close to your salary payments to avoid missing a payment and damaging your credit profile. Managing your credit profile is essential for long-term wealth creation.
• If you buy something on credit, update your budget to reflect the new monthly expense.
• Know your payment date and pay on time and in full.
• Use a budget facility to help you manage your credit responsibly.
• Accrue savings for an emergency rather than relying on your credit card.

Tip: Struggling to settle your credit card and other debts? Learn more about debt counselling