credit limit

How Credit Limit Works in Canada

Many people from different parts of the world try to avoid being drawn into the dangerous web of financial debts. one common way to avoid this is the use of a credit limit.  Credit cards offer a superb way to organize your expenses and live within your budget.

We often go above our means either for emergency situations like a health crisis or just to satisfy a bad habit, which can lead to a pile of credit card debts.

The majority of us have at least one credit card, and by implication, everyone is having one credit balance or the other to manage. Therefore every credit card issued to cardholders has spending limits assigned to them. This maximum limit varies by cardholders and card issuers. It is usually determined by the cardholder’s financial information at the disposal of the bank or credit card issuer as well as the policy of the bank.

What is a Credit Limit?

The credit limit is the maximum monthly spending limit or amount available on your card to make purchases or cash advances. Your credit limit is usually displayed on your account statement and is determined by several factors. Whenever the maximum spending limit on the credit card is exceeded, the bank imposes a penalty charge on the cardholder.

How Credit Limit Works

The credit limit on your credit card is the maximum outstanding balance that you are allowed to carry at any time without any penalty charges on your account. Hence, it is essential to have a foreknowledge of the credit limit on your credit card before making use of the card for purchases or cash advances. If you overuse or exceed your credit limit, there may be a decline on your credit card, coupled with other charges.

When you apply for a credit card, the card issuer considers several factors in determining the credit limit that will be assigned to you. You might also be allowed to choose your preferred credit limit, but the bank has the prerogative to specify your credit limit based on your financial capability.

Credit limit works like a spending limit on an advanced credit, which you must pay back. Most people exceed the credit limit on their card or what they can afford to pay back, and when they are unable to meet up with the payment, a huge pile of debt gathers on their credit card.

Factors That Determine Your Credit Limit

When you receive your credit card, you should be able to notice your assigned credit limit. Although this may not be what you wanted or expected, there are certain factors that guide credit card issuers in determining how much spending limit a credit cardholder should have.

Credit Score

Banks and credit card issuers employ different methods to determine what credit limit should be assigned to a cardholder, but the most consistent and significant factor is the credit score of the card applicant.

As an applicant, if you have a strong or high credit score, which is usually about 670 and above, you are seen as a low-risk client to the bank. This means you have a history of paying your bills on time without defaults. As a result, the bank or credit card issuer will provide you with a high credit limit.

On the other hand, if your credit history indicates late payments of bills and a history of credit or loan decline, it implies a lower credit score. The low credit rating – which is usually anything below 670 – may be seen by the bank or credit card issuer as a potentially high risk. This may result in having a lower credit limit if eventually approved for a credit card.

Annual/Monthly Income Level

The majority of credit card issuers set minimum income requirements which you must meet in order to be eligible for their credit card. If you have a high income, you are likely to get a high credit limit, and vice versa.

Other determining factors for your credit limit include:

  • Debt profile
  • Rate of applications for other forms of credit or loan
  • Type of credit card
  • Credit card provider/issuer
  • Length of credit history

How To Increase Your Credit Limit

Irrespective of how low your credit limit is, it can be beneficial to your overall credit score, when you do not exceed the limit and pay your credit card balance in full as at when due. There are diverse reasons why people increase their credit limit. If the spending limit on your credit card is unable to meet your needs, a credit limit increase can actually be worthwhile.

One important factor to consider is the proper usage of your available credit and timely payment of your monthly balance. When this is done, you may be eligible for an increase in your credit limit, and requesting a boost can be conveniently processed.

The following are some of the measures that must be in place in order to get approved for a credit limit increase:

  • You must have been a cardholder for at least six months or more.
  • You must have been consistent in paying your credit card balance in full every month.
  • You must have an improved credit score.
  • You must have been using your credit card actively and credibly, that is, good spending habits.
  • You must have an improved income, compared to when the card was issued to you.
  • You might need to inform the bank or credit card issuer by applying for a credit limit increase via online banking services, over the phone, or at any of the bank’s branches. Although in some rare occasions, the bank may offer you a credit limit increase after considering your overall financial standing.

Benefits of Credit Limit Increase

Before proceeding to request an increase in your credit limit, it is vital to consider the pros of such action.

  • A high credit limit increases the amount of unused credit at your disposal, which then gives you a higher credit score as a result of the lower credit utilization ratio.
  • An increased credit limit will also give you an improved amount of available credit, which can be vital for financial emergencies.
  • A high credit limit can help you to earn more rewards points and cashback when you use your credit card on large eligible purchases.

Flaws of Credit Limit Increase

  • One of the many drawbacks of having an increased credit limit is that if not properly handled, it increases your likelihood of having a buildup of credit card debts.
  • Another deficiency of a boosted credit limit is that it may trigger a hard inquiry on your credit report by the issuer. This is to determine if they will grant your request for a credit limit increase or not. The implication of this is that it can negatively affect your credit score.
  • With a booted credit limit, the outstanding balance which rolls over from one month to the next will attract an increase in interest charges.

High And Low Limit Credit Cards In Canada

Refresh Financial Secured Visa Card

Minimum Credit Limit: $200

Scotiabank More Rewards Visa Card

Minimum Credit Limit: $500

No-Fee Scotiabank Value Visa Card

Minimum Credit Limit: $500

TD Platinum Travel Visa Card

Minimum Credit Limit: $1000

TD Emerald Flex Rate Visa Card

Minimum Credit Limit: $1000

TD Aeroplan Visa Platinum Card

Minimum Credit Limit: $1500

Scotiabank Gold American Express Card

Minimum Credit Limit: $5000

TD Cash Back Visa Infinite Card

Minimum credit limit: $5000

TD Aeroplan Visa Infinite Privilege Card

Minimum Credit Limit: $10,000

Scotiabank Platinum American Express Card

Minimum Credit Limit: $10,000

FAQs

What is the credit limit for MasterCard?

The credit limit for MasterCard credit cardholders varies and is a factor of the bank or credit card issuer. The credit limit ranges from 200 CAD to about 5000 CAD or more and is determined by the card issuer.

What is the credit limit for the Visa card?

There is no specific spending limit on the visa card. Once approved for a credit card, the card issuer will determine your credit limit.

Can you overspend your credit card limit?

If you exceed your credit limit while making purchases, the transaction may be declined by the financial institution. However, if the transaction is approved and you exceed your credit limit, the card issuer will charge you a penalty fee.

As a credit cardholder, am I automatically eligible for a credit limit increase?

To be eligible for a credit limit increase, you must have been operating your credit card account for at least six months or more depending on the provider, and with favorable spending and payment routine.

Once I request for credit limit increase, can I automatically expect the boost in my credit limit?

Getting a credit limit is subject to the approval of the credit card issuer. The bank or credit card issuer reserves the right to approve or decline a request for a credit limit increase. Sometimes, the card issuer through account reviews may notify the cardholder of an offer for a credit limit increase, which the cardholder can either accept or decline.

If I decrease or lower my credit limit, can I increase it again?

Yes. You can increase your credit limit even after previously decreasing it. However, there is always a waiting period between different applications. Hence, you might have to wait for about six months to get another increase, depending on the issuer of the card.

Will a request for a credit limit increase affect my credit score?

Most times, when you make a request for an increase, the card issuer executes a hard inquiry on your credit report, which may consequently reduce your overall credit rating temporarily.

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