How does the credit card limit work?

If you are someone who has recently acquired a credit card and is confused about how the whole system works, worry not. We are here to tell you about the credit card limit and how it is determined.

What is a credit limit?

A credit limit is the total amount of money you can spend using your credit card per month. This limit is pre-decided by your credit card provider. For example, if your credit limit is Rs. 50,000 per month, you can only spend that much in a month. If you extend the credit limit, you will be liable to pay an over-limit charge. And such a charge will depend on the extra money you have spent. 

Spending within your credit limit has a lot of financial advantages, including developing good financial habits and a good credit score.

Factors determining credit card limit

Certain factors determine your credit card limit. Let us look at some of these factors to learn more about them.

Income

If you are applying for a credit card for the first time, your monthly income would be vital in determining your credit limit. 

Your in-hand salary, devoid of PF, and external allowances, will affect this value. A lender usually gives a credit limit of twice or three times the value of your monthly income. 

First-time users initially have a low credit limit. But if they use their credit card well, and stay within their credit limit, their limit will soon increase.

Credit score

Your credit score is another important factor that influences your credit limit. If you don’t default on your loan payments and stay within your credit limit, you will retain a higher credit score.

If you do not make wise financial decisions, your credit history will show unpredictable banking behaviour. In such cases, your credit score will decrease and negatively influence your credit limit.

Debt-To-Income Ratio

Simply put, the debt-to-income ratio is the ratio between the number of debts you owe to your overall income. This ratio determines your credit card limit. The lenders look at your present debt, history of payments and EMIs to determine this ratio. Try to minimise your debt-to-income balance to get a higher credit limit.

Credit Limit of other banks

Most banks’ credit limit is relatively the same. And they check the credit limit offered by the competitive lender. It influences their decision on the credit limit they set for their customers. It shows that other external factors, not just your financial situation, can affect your credit limit.

Difference between Total credit limit and available credit limit

New credit card holders might need help differentiating the total and available credit limits. The total credit limit is the amount of money you can avail using your credit every month. Available credit limit, on the other hand, is the amount of money you still have available on your credit card on the respective date.

For example, you have a credit limit of Rs. 40,000 per month. In case you spent Rs. 20,000 that month, your available credit limit is now Rs. 20,000. 

How to increase your credit Limit?

To increase your credit limit, make smart financial choices. Let us look at the various ways to increase the credit limit.

Sensible use of credit card

The bank will increase your credit limit once they see that you are using your credit card wisely. It means that you need to be regular with your credit card spending. Keeping your credit utilisation within 30% of your credit limit is advisable. This way, maintaining a balance will hold you in good status. And concerning that, the banks might consider increasing the credit limit of your credit card.

Request your bank for a credit limit increase

Most banks can increase your credit card limit if you request them. You should make a formal request for this. It includes filling out a form and providing the requisite documents. Upon receiving such a request, the bank might increase the credit limit depending on your needs and the application.

Also Read: Top Reasons To Avoid Credit Card Late Payments

Regular Bill PaymentsAn automatic way of improving your credit limit is by ensuring you don’t falter in paying your credit card bill payment. Pay them regularly every month, and the bank will increase your credit limit. Paying your bills on time leaves a good impression on the bank. They realise you are a responsible customer who takes their finances seriously. Considering that, they will reward you with a higher credit limit.

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