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    Credit Card Limit

    Credit card limit or simply credit limit is something which every credit card user is well aware of. But for those who are new to credit cards, the terms like credit limit, available limit, and total limit are at times quite confusing. To clear all such confusions here is a comprehensive guide covering all the topics related to credit limit.

    What is Credit limit?

    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.

    How do Banks Determine Credit Card Limit?

    When you apply for a credit card, the bank collects various details pertaining to your sources of income as well as your loans. It usually asks for your income proofs such as salary slips and income tax returns to know your income status. Further, it looks into your credit profile, which includes credit score, reports from credit bureau, loan history, repayment history and your usage habits, among others.

    Once it has all the information regarding your income and commitments on a monthly basis, it will multiply your gross monthly income by, say 2.5 or 3 times, depending on the risk involved and the bank’s credit policy. It will then deduct your fixed monthly obligations including your monthly needs, EMIs towards any loans and others from the multiplied amount.

    It then divides all you monthly EMIs by your gross income to calculate debt-burden ratio. The credit limit is usually a portion of the ratio.

    For you to expect high card limit, your monthly obligations should be less, leaving you with a decent amount of unused cash in your account. If your bank statement shows that you spend most of your income every month, you will end up getting a credit card with less credit limit, as the bank may doubt your ability to spend and pay.

    What is the Difference Between Total Credit Limit and Available Credit Limit?

    Total credit limit is the maximum credit card limit available on your card at the time of issuance. Banks will inform you the total limit on your card once it is issued.

    Available credit limit, on the other hand, is the amount available for spending on your card at any given point of time. It is the difference between your total credit limit and your due on the card.

    For instance, if you receive a credit limit of Rs.60,000 and spent Rs.10,000, your total credit limit is Rs.60,000, whereas your available limit is Rs.50,000, which is the amount available for spending on the card.

    While the total credit limit on your card remains the same, unless the bank makes any change, the available limit keeps reducing as your spending on the card increases.

    As banks reserve the right to decide the type of credit card and its limit based on your eligibility, you may sometimes get a credit card different from the one you’ve applied for. Therefore, once you receive the card, ensure to know the type of credit card, its features and most importantly its credit limit.

    How to Check My Credit Limit and Available Credit Limit?

    If you have one or more credit cards, knowing your credit limits and available credits is very important to keep your spending on the card within the credit limit. It helps you avoid over-limit charges, which will be levied by your banker once you cross the specified limit on your card.

    There are three ways to check your credit card limit and available balance.

    1. Recent billing statement: Banks usually generate monthly e-mail statement for your credit card irrespective of you making purchases on your card. You can check your credit limit, outstanding on the card and also the available balance.

    However, if you made any purchases using your card after receiving the last billing statement, the available credit on your card may vary.

    1. Internet banking: If you have an online banking account in which your credit card is registered, you can get more accurate details. Compared to the billing statement, the online version provides up to date information on your card. However, very recent purchases on the card may not reflect immediately. Make sure to check the available balance 2-3 days after your last transaction on the card.
    1. Customer helpline: The third option to check your available and total credit limit is to call the customer care. Many banks offer an automated service to check your available balance, however, you can also speak to the executive if you need further details. You are likely to get the most up to date information about your available credit balance through this method.

    How Much Credit Limit Can I Use?

    Technically, full. As the credit limit itself sets the maximum limit on your credit card spending, why to keep a limit on the limit again. This makes sense. However, there is something called credit utilisation ratio, which is one of the important factors considered to find the creditworthiness of the person. It impacts up to 30% of your credit score.

    Well, there are two new terms here, credit utilisation ratio and credit score. To better understand how credit limit is linked to both, let’s first understand the terms individually.

    • Credit Utilisation Ratio: Credit utilisation ratio or credit utilisation rate is the amount of credit you’ve used on all your credit cards divided by the total amount of credit limit available on all the cards. Simply put, it’s your total credit card debt to total credit limit on all your credit cards.

    Expressed in percentage, credit utilisation ratio indicates how much of your available credit you’ve used.

    For instance, if you have two credit cards each having a credit limit of Rs.25,000, and if you have spent Rs.5000 on each card, your credit utilisation ratio will be

    5000+5000/25000+25000 = 10000/50000 = 0.2*100 = 20%

    This indicates that you have used 20% of your available credit limit. Credit utilisation rate can be calculated for all your credit cards or for individual cards.

    The more credit utilisation ratio indicates you are highly dependent on credit.

    • Credit Score: Credit score is a number calculated based on your credit history. It typically represents the creditworthiness of a person.

    Ranging from 300 to 850, credit score is calculated by considering many factors including the total debt of the individual, number of late payments, credit utilisation ratio, type of availed loans, age of loans, etc.

    A higher credit score indicates less credit risk, whereas a lower score indicates higher risk.

    Credit score essentially helps lenders to understand the repayment behaviour of the applicant, thereby enables them to decide their eligibility for loans other financial products.

    Now coming back to our main topic, how much of credit limit can be used – Spending most of your credit limit will impact your credit utilisation ratio, thereby affects your credit score. This becomes problematic when you are applying for any other loans such as home loan or personal loan.

    The lenders, as mentioned earlier, will certainly look into your credit score, before going any further with your loan application. If they find a low credit score due to high credit utilisation, chances are likely that they may reduce your loan amount or increase your interest rate.

    In order to avoid such situations in future, it is recommend to keep your credit utilisation ratio to 30%. Which means, try to limit your spending to 30% of your total credit limit. This can be possible only be cutting down your spending or by increasing the credit limit of your card.

    Is the Credit Limit Monthly?

    Not exactly. Credit cards typically work on revolving credit lines, which do not have a pre-determined end date. That means there is no end point when your limit expires nor there is any point when it gets renewed. Your card limit stays the same throughout its lifetime, unless the banker enhances it.

    The amount you use on your credit card gets deducted from the total limit and whenever you repay it, it gets back to original. There is no limit as to how much limit you can use for a month. You can use all your credit limit at any point of time and to get it all again you need to repay it either in parts or in total, at your convenience.

    Therefore, having available balance on your card is completely in your hands. You use it and repay it on time to avoid interest and to use it again whenever necessary.

    What happens if I exceed My Credit Limit?

    You may sometimes mistakenly over spend on your credit card. In such cases, you may end up in two situations. Either, your transaction will be declined or you will be levied a penalty for spending above your total limit.

    The result of over-limit spending will vary from card to card and from provider to provider. While some banks allow you to over spend, some others decline the transaction which is more than your available limit.

    • Transaction gets Declined: In case, your transaction gets declined, it’s good for you. You can save from the charges levied for exceeding your limit. However, if you want that transaction to be processed simply add the cash, which is short to process the transaction, to your card.

    For instance, if you are purchasing a phone worth Rs.32,000 and you have only Rs.31,000 available credit on your credit card, simply add Rs.1000 to your card and use your card.

    In case, the available balance is too low to process the transaction, you can call the bank’s customer care for limit enhancement on your card, provided you’ve used your card for at least 12-15 months. Increasing your credit card limit is completely at the bank’s discretion.

    • Transaction Gets Accepted with a Fee: If your credit card provider allows you to spend over the available limit on your card, beware, he won’t do it for free. Banks allow over the limit credit card transactions, so that they can charge for every penny spent above the limit.

    They typically charge 2.5%-3.5% of over-limit fee for the amount exceeding the limit or a minimum of Rs.500, based on their terms and conditions.

    Irrespective of your banker allowing you to over spend, it is always recommended to keep your credit card spending within the allowable brackets. Using the limit to the maximum or exceeding your credit limit consistently will significantly impact your credit score.

    It is also a healthy practice to lock your cards at the limit to prevent overspending. You can ask to bank to do in case it’s not active.

    Can I Increase My Credit Card Total Limit?

    Yes, every credit card user can apply for a credit limit increase on their cards. However, one should use the card for a minimum of six months before applying for limit enhancement. The terms and conditions, however, vary from bank to bank.

    When Can I Consider Applying for Credit Limit Enhancement?

    You may need to increase your total credit limit for two good reasons – one is out of need and other is to achieve a high credit score.

    • Insufficient Current Limit: When the current credit limit is not meeting your needs, you can apply for limit enhancement.
    • For Better Credit Score: Your current card limit is sufficient for you, but you still have to apply for enhancement, if you’re using your entire limit or most of it consistently over the months. As utilising most of the total credit increases your credit utilisation ratio, one way to keep it down and boost your credit score is to increase your total limit, while sticking to similar spending patterns.

    If you increase your spending along with the limit enhancement, your efforts to achieve a healthy credit score go in vain. Therefore, make sure to keep your expenditure on the card to 30% of your total limit at any time.

    You can also consider limit enhancement instead of applying for a new card. Though the bigger card limit on the new card will count in your credit score, the number of credit lines you have also factor into credit score. Hence, it is advisable to have one card with higher card limit than having multiple.

    How to Increase Credit Card Limit?

    There are two ways you can receive a limit enhancement on your credit card. One is an automatic upgrade and the other is to request for enhancement on your own.

    • Automatic Credit Enhancement: Banks review your credit card account periodically. If they find you to be a trustworthy customer, you may receive a call or an SMS from the bank offering a credit limit increase on your card. However, for the bank to consider you to be trustworthy, you should pay your outstanding dues on time, spend small amounts on your card, and try to keep your credit score high.
    • Limit Enhancement on Request: Despite you following all good credit practices, the banks may sometimes fail to notice. In that case, you can simply call the customer care and raise a request for credit limit increase.

    Make sure to bring your good credit behaviour to their notice to get it done quickly. Also let them know if your income gets increased due to a promotion/hike or job change in the recent times and if you have cleared any of your existing loan. By evaluating related proofs, they may consider your request. However, approving your limit increase request is completely at bank’s discretion.

    Can Banks Decrease My Credit Limit?

    When the banks can revise your credit limit upwards based on your good repayment behaviour, they can also revise it downwards if your repayment patterns hint a possible default.

    While reviewing your account on a timely basis, if the card issuers found any behaviour susceptible for default they don’t hesitate to decrease your credit limit.

    Customers are also allowed to request for a decrease in their credit limit if they think it should be cut down to prevent overspending.

    Credit Limit vs. Cash Limit

    Credit limit and cash limit are two different features available on a credit card. Even before knowing the difference, let’s be sure about one thing – credit cards, unlike debit cards, should not be used to withdraw cash, they should be used only to make online transactions such as shopping, paying bills, etc.

    That being said, there is one feature that lets you withdraw cash using your credit card - the cash limit feature. Your card’s cash limit will be mentioned in the kit received by you along with your card. You can also find the same in your bill statement or in your online banking account.

    Cash limit, therefore, is the maximum amount of money you can withdraw using your credit card. It is usually a part of your total credit limit.

    Hence your total credit limit minus your cash limit tells you how much you have to shop on your credit card. If you haven’t used your credit card even once, your available limit will be the maximum available for you to shop or make payments, while cash limit is the maximum cash you can withdraw using your credit card.

    Before withdrawing cash from your credit card, make sure whether or not your card is eligible for cash withdrawal, if yes, know the limit and the rate of interest and other charges levied.

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