Learning about credit limits could be confusing. But it isn’t impossible to do so. To put it simply, the credit limit on your card is the maximum amount that you can spend on your card without you being charged any penalty.
Credit limit, as the name indicates, is the purchase limit set by the credit card company or a bank on a particular credit card. The limit, which is usually in terms of money, is the maximum amount the user can spend using the credit card.
For instance, if your bank provides you a credit card with a limit of Rs.50,000, you cannot spend beyond that amount on your card.
The credit limit varies based on the type of credit card and is determined based on the customer’s eligibility.
When you apply for a credit card, your bank determines your credit limit. This is done by taking multiple factors into consideration. These include:
And most importantly, your credit limit is determined by:
If the card you are applying for is your first credit card or you don’t have any credit to your name, chances are that your credit card will have a low credit limit. This is because the bank doesn’t quite know if they should take a risk on you or not.
The good thing is that a low credit limit doesn’t stay low for a long period of time. If you use your card often and make your payments in full and on time, the bank will give you the option to increase the credit limit on your card.
If you have scrutinised your statement, you will see that there are two limits mentioned – your total credit limit and your available credit limit.
So, what exactly are these?
Your total credit limit is the amount above which if you spend, the bank will charge you a penalty. This is basically the same as the credit limit mentioned early on.
Your available credit limit, on the other hand, is the amount you currently have available to spend.
Let’s say that you have a credit card from Bank A with a total credit limit of Rs.50,000. This means that you can spend up to Rs.50,000 using your credit card. Now, let’s assume that in a given month, you spend Rs.28,000. The available credit limit is now Rs.22,000.
This means that of the Rs.50,000 credit limit, you have spent Rs.28,000. So, you can now spend Rs.22,000 more before you reach the credit limit.
When you make payments each month, your credit limit increases by that amount. And so does your available credit limit.
If you take this example into consideration, let’s say that you pay the Rs.28,000 that you owe. Your total credit limit is still Rs.50,000, but this time your available credit limit is also Rs.50,000.
You now know what your credit limit is. This information should be enough for your day-to-day credit card related transactions, right?
Well, not quite.
Remember that all-important credit score? Well, your credit limit indirectly ties into it.
It ties into it with the help of a widely used ratio which is used to calculate the current amount you owe on your card compared to the total credit extended to you and is expressed as a percentage.
The formula for the same will be:
It is generally advisable to keep your credit utilisation ratio under 30%.
Your credit utilisation ratio, as the name suggests, looks at how much of the available credit you tend to use. If your utilisation ratio is high every month (i.e., the amount you spend is close to your total credit limit), lenders tend to think of you as credit hungry. They also slate you as someone who is not able to manage their finances and hence may default on a payment.
This, in turn, leads to a reduction in your credit score making it that much harder for you to get a loan.
A low credit utilisation ration, on the other hand, means that you not only know how to manage your finances, but you will in all probability pay your bills in full and on time. From a lender’s point of view, you are someone they can hedge their bets on. In other words, a low credit utilisation ratio will lead to an increase in your credit score. This makes it more likely that if you are to apply for a loan, your loan application will mostly be approved.
Using an Example to Understand Credit Utilisation Ratio
Your credit card from Bank A comes with a total credit limit of Rs.50,000. In the month of May, you charged Rs.35,000 to your card. Nothing wrong in that since it is within the credit limit.
The credit utilisation ratio, however, is 70% [(35,000/50,000) x 100]. This is much higher than the advisable percentage.
This high credit utilisation ratio could adversely affect your credit score.
Now that you know how important your credit limit is, the question to ask is how do you increase the credit limit on your card?
You probably already have surmised some of the benefits of increasing the credit limit on your card, but here they are just so you know how an increase in your card’s credit limit can help you:
Lowers Your Credit Utilisation Ratio: You probably already know this. But the importance of maintaining a low credit utilisation ratio cannot be stated enough. The lower the ratio the higher your CIBIL score.
Makes It Easier to Get Loans: A high credit limit that you do not use makes banks and lenders look at you more favourably. Thus, getting approved for a loan becomes that much easier.
Helps During an Emergency: A higher credit limit always comes in handy during a financial or a health emergency.
Access to Perks: Most credit cards that come with a high credit limit also come with many perks such as airport lounge access, membership to hotels, etc.
Your credit card limit is based on a number of factors such as your income and your CIBIL score. As such, each person’s credit limit will differ.
Yes, you can request your bank to increase the total credit limit on your card.
If your transaction is not declined, you will be charged an overlimit penalty.
Ideally, if all your documents are in place a credit limit increase shouldn’t take more than a few days. However, this could differ from bank to bank.
An increase in your credit limit without a simultaneous increase in your expenses will lead to a lower credit utilisation ratio. This, in turn, may help in improving your CIBIL score.
Yes, it is good to accept an increase in your credit limit because it means that the bank trusts you with credit. As such, other lenders are likely to trust you with credit as well.
There could be many reasons why your credit limit increase may have been denied. Low income, decreased utilisation of credit card or default payments are few reasons.
In general, reducing your credit card limit without also reducing how much you charge to your card is not a good idea. However, if you believe that a higher credit limit will only tempt you to spend, then do request for your limit to be reduced.
Yes, your credit limit can be reduced by the bank. This is generally done due to low usage or if you have missed/defaulted on your payments multiple times. If you find that the credit limit on your card has been decreased, do call your card issuer and request for an explanation.
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