The Lemon Fool

DAK what the credit limit on a credit card actually means? Is it the maximum balance you can have on the card at any one time? Or the maximum spend you can put on that card in a monthly billing cycle?

Specifically, suppose I have a card with a £2,000 limit. Assume no current charges on it. I plan on making a £2,500 purchase. Can I deposit £500 into the card account in advance, and then the £2,500 charge should go through? Or is £2,000 the most I can ever put on that card at a time regardless of the balance?

Lootman wrote:DAK what the credit limit on a credit card actually means? Is it the maximum balance you can have on the card at any one time? Or the maximum spend you can put on that card in a monthly billing cycle?

Specifically, suppose I have a card with a £2,000 limit. Assume no current charges on it. I plan on making a £2,500 purchase. Can I deposit £500 into the card account in advance, and then the £2,500 charge should go through? Or is £2,000 the most I can ever put on that card at a time regardless of the balance?

It's the level of balance the card will automatically allow without reference to the bank for approval.

You might have a £2,000 limit and still be able to purchase a £2,500 item (assuming zero balance to start with), but the bank's software will be alerted and a decision made (by a "machine" initially) to decide whether to allow or not (and quite possibly charge an "exceed credit limit" fee).

You can make a credit payment to the card in advance, though you would need to check Ts & Cs to see whether that is "allowed" or not technically. Above a certain size this too will be "flagged" for investigation (again usually initially by the software in the "machine"). In practice credits are made all the time, as transactions are reversed, and of course payments in the normal sense by account holders to reduce or extinguish their monthly balances.

Credit limits also serve another purpose, and that is to dictate the Capital costs to the providers of running the service and the potential contingent liabilities they run. That's rather more prosaic and less relevant to an individual card holder - but explains why some users are offered extended limits, and others see cuts in consistently under utilised credit limits.

Specifically, speaking to the bank in advance with details about the £2,500 purchase using a card with a £2,000 limit is a way of achieving that outcome, painful though that might be as a customer having to engage with a bank in that way.

dealtn wrote:

Lootman wrote:DAK what the credit limit on a credit card actually means? Is it the maximum balance you can have on the card at any one time? Or the maximum spend you can put on that card in a monthly billing cycle?

Specifically, suppose I have a card with a £2,000 limit. Assume no current charges on it. I plan on making a £2,500 purchase. Can I deposit £500 into the card account in advance, and then the £2,500 charge should go through? Or is £2,000 the most I can ever put on that card at a time regardless of the balance?

speaking to the bank in advance with details about the £2,500 purchase using a card with a £2,000 limit is a way of achieving that outcome, painful though that might be as a customer having to engage with a bank in that way.

Thank you for the detailed response. And yes, I had thought of talking to the bank although, as you note, such discussions can be painful. Of course my example could be 5 purchases of £500 instead, so that no one purchase is above the credit limit.

It sounds like you want to be in control and stay with your limit
I would NEVER go over my limit (old school - don't buy what you can't afford)
but if I had to I would definitely talk to the credit card company first
Going over limits does not serve you well
If you have a good history they may well increase your limit as, in my cyncial view, they want you to borrow as much as possible in the hope that you won't pay it all back and start to rack up interest charges

pje16 wrote:If you have a good history they may well increase your limit as, in my cyncial view, they want you to borrow as much as possible in the hope that you won't pay it all back and start to rack up interest charges

No.

They don't want you to be in a position where you don't pay it all back. They may be happy if you don't pay it all back within the interest free period, and hence receive interest, but that's different to not paying it all back.

dealtn wrote:

pje16 wrote:If you have a good history they may well increase your limit as, in my cyncial view, they want you to borrow as much as possible in the hope that you won't pay it all back and start to rack up interest charges

No.

They don't want you to be in a position where you don't pay it all back. They may be happy if you don't pay it all back within the interest free period, and hence receive interest, but that's different to not paying it all back.

I said that was my cyncial view
perhaps I should have add "pay back within the first statement deadline"
Why do they keep increasing users limits then?
Several of mine are now thousands higher then when I first had them

I paid a bill of about £5000 pounds above my limit on the credit card by phoning up in advance to ask permission, giving the name of the company to be paid. They asked a few questions and agreed. Much to the surprise of the company concerned the payment went through with no trouble. The credit card company have left the new limit in place.

pje16 wrote:Why do they keep increasing users limits then?
Several of mine are now thousands higher then when I first had them

Because as a business decision that's a likely profitable outcome. The same as why they also cut limits.

If customers remain, pay interest at a higher cost of funding than the provider can access, and the debt is repaid and not likely to go bad, and the capital cost of the increased asset is less marginal than the profit, it makes sense.

In practice the bank analyses the aggregation of a number of customers of similar profiles rather than the individual in its credit limit application, atv least initially, but can also undertake individual assessment to either increase or decrease specific exposures.

As someone who uses a credit card as much as poss and clears in full...

In my experience, any card used for daily spending needs a limit which is at least x2 average monthly spend, plus whatever you need for emergencies/holiday bookings etc. Anything less is likely to cause "credit limit anxiety" as you get towards payment day.

It needs to be x2, as from statement day until payment day, you are carrying last month's spend and the accumulating spend for this month.
Given that my statement date comes around 4 days after my payment date, that effectively means almost a full months spending is on the account by payment day, so my maximum balance is pretty much last month's spend+this month's spend.

A card which is only used abroad for the odd two week business trip or holiday only needs to be capable of covering a two week holiday spend, plus £1000 for a hire car authorisation and two weeks of hotel authorisation (even if they are prepaid).

PochiSoldi

Lootman wrote:Thank you for the detailed response. And yes, I had thought of talking to the bank although, as you note, such discussions can be painful. Of course my example could be 5 purchases of £500 instead, so that no one purchase is above the credit limit.

You can make multiple credit card payments per month.

If the 5 purchases are spread over a week or so make the first purchase, wait for it to post, and pay it off before making the last charge.

9873210 wrote:

Lootman wrote:Thank you for the detailed response. And yes, I had thought of talking to the bank although, as you note, such discussions can be painful. Of course my example could be 5 purchases of £500 instead, so that no one purchase is above the credit limit.

You can make multiple credit card payments per month.

If the 5 purchases are spread over a week or so make the first purchase, wait for it to post, and pay it off before making the last charge.

Yes, I had thought the same thing i.e. that if you have a low credit limit then make more regular payments so that the limit is never exceeded at any point in time.

Even so, a card issuer could have checks in place that restrict total charges within a monthly billing cycle to the limit, in which case our cunning plan would not work. I am guessing not though.

I have had no problem paying into my card, and the balance going negative, before making a large charge to the card (private medical bills).
That way I got my 0.5% cashback on large private medical bills (every little helps!)

But banks like customers who don't pay it all back as they are the ones paying fees and interest charges to the bank.

I have always paid off the full balance on my credit cards each month.

I use my cards for pretty much everything (get points galore !)
and all set to pay in full via direct debit - works a treat

pje16 wrote:I use my cards for pretty much everything (get points galore !)

and all set to pay in full via direct debit - works a treat

Well, that's the thing isn't it? But with a low credit limit then to maximize those points/miles/rewards, you might need to be creative about how to put more on the card each month than the limit ostensibly allows.

Sorry, should have said
I'm good boy, NEVER been over a limit
When I got my first one I was worried about it ruining my finances and that stuck with me !
I know young folk at work who don't give a sh*t about that
One said "When I die what do I care"

Lootman wrote:

9873210 wrote:

Lootman wrote:Thank you for the detailed response. And yes, I had thought of talking to the bank although, as you note, such discussions can be painful. Of course my example could be 5 purchases of £500 instead, so that no one purchase is above the credit limit.

You can make multiple credit card payments per month.

If the 5 purchases are spread over a week or so make the first purchase, wait for it to post, and pay it off before making the last charge.

Yes, I had thought the same thing i.e. that if you have a low credit limit then make more regular payments so that the limit is never exceeded at any point in time.

Even so, a card issuer could have checks in place that restrict total charges within a monthly billing cycle to the limit, in which case our cunning plan would not work. I am guessing not though.

I've actually done this for a holiday, back before the internet, so the logistics where harder. But that was long ago and for exactly one company. That doesn't mean it will work everywhere.

As I read the terms and conditions the credit card company can decline any purchase at any time for almost any (or no) reason, so if you're paranoid you should never put yourself in a position where you absolutely need to use a card. But strange as it may seem they don't like annoying customers, so they tend to be reasonable.

pje16 wrote:Sorry, should have said

I'm good boy, NEVER been over a limit

Right but then that gets back to my original question. If I have a 2K limit and I pay in 1K a week, then I can spend much more than 2K a month on that card without ever exceeding the limit.

But will the card issuer object to that anyway even though the limit was never exceeded and their risk was never more than 2K? Just because of the total spend?

Not as far as I know (object that is)
but not sure why you want to do that, it's a faff to keep track of
just ask for a limit increase

Lootman wrote:

pje16 wrote:Sorry, should have said

I'm good boy, NEVER been over a limit

Right but then that gets back to my original question. If I have a 2K limit and I pay in 1K a week, then I can spend much more than 2K a month on that card without ever exceeding the limit.

But will the card issuer object to that anyway even though the limit was never exceeded and their risk was never more than 2K? Just because of the total spend?

No, the limit is the outstanding balance on the card, not the total value of transactions over a given time period. So you should never let the outstanding balance exceed the credit limit at any point in time, but you can spend 10 times the limit in a month as long as you make payments in to cover it.

I’m not so sure that all cards allow you to put them in credit intending to make a purchase shortly after exceeding the credit limit. Perhaps by prior arrangement it’s different.

I always pay my CCs in full and often a bit more because (as pointed out above) the amount on the card at the time I pay is far over the statement amount. However once I inadvertently paid enough to put the card into credit and within days I had a letter from the issuer (M&S) pointing this out and giving a deadline to remove the credit by spending on the card otherwise it would be refunded to me by cheque.