Credit cards have changed the way people transact as they no longer need to carry cash with them to pay at a store or to make bill payments. Credit card is a convenient plastic money with which the spending psychology of people have changed a lot as shopping or purchasing can be done with just a swipe even if you are short of money in your savings/current account. A credit card limit is assigned by the bank on each of your credit cards which is the maximum sanctioned limit. Let us understand credit card limit in detail.
What is Credit Card Limit?
Credit Card Limit is the maximum amount available on your credit card that your bank is willing to let you utilize and spend. Credit limit is set by banks for each credit card that they offer to the users. Banks set this credit card limit depending upon the information you provide like your occupation, monthly income, age, gender etc. Managing credit card limit is important as it helps in achieving good credit score and staying out of debt.
How is credit limit determined?
Credit limit is determined by the bank when you apply for a credit card. Your credit card limit is determined by considering various factors like: your income, liabilities, repayment history and credit history. All these factors have a major effect on your credit card limit because if you have a bad credit history like non-repayment of liabilities or late payment of liabilities, high liabilities, low income level etc. then your bank might not approve a higher limit on your credit card but if you have a new credit history then your bank might approve low credit card limit in the initial days.
You will get to know your credit card limit once you finish your application process and are approved for a credit card. If you are unhappy about the credit limit offered then you have an option to either ask for bigger credit card limit or not accept the credit card. Another important aspect related to credit card limit is that if you have been offered low credit limit in the initial days, you should not worry about it as credit limit can be increased later. If you have a good repayment schedule and make wise use of credit card then your bank offers you an increased credit limit but if your repayment schedule is not on time or your payment instruments have bounced multiple times, the bank has all the right to decrease your credit limit. Thus, using your credit card limits wisely and responsibly will result in your bank increasing your credit limit periodically.
How to increase credit card limit?
Usually, banks keep a close a check on individual credit card usages and decide whether a particular card holder should be allowed a higher credit limit. If you are eligible, the bank will inform you the same on your registered mobile number or e-mail ID.
Also, if you feel that you are eligible for a higher credit limit then you can at any time reach your bank for increase in the credit limit. Banks usually welcome the proposal for increasing the credit card limit subject to responsible usage of credit card limit or in cases of increase in annual income. The final decision, however, lies with the bank.
You can send a request for credit card limit increase by writing to the bank or by calling the customer care of the bank. Some banks give the option of raising a request through their internet banking portal or mobile app.
How does credit card limit affect your credit score?
Credit score is an analysis of your credit history represented in a numerical manner. It is utilized to determine your credit worthiness. Higher the score higher is your credit worthiness and vice versa. All banking and financial institutions use this credit score to determine your loan eligibility and the interest rate on it.
Usage of credit limit of credit card affects your credit score as every month your credit limit and credit utilization is reported to credit bureaus. Based on this information your credit utilization ratio is calculated. Generally credit utilization ratio within the range of 10% to 30% is considered to be good. However, if you keep your credit utilization ratio at 10% or below then you will be considered as individual with best credit score. So the key to keep your credit score high is to use credit card limit wisely because if your credit utilization ratio goes up then it will hamper your credit score. The best ways to keep your credit score high are:
- Minimizing the credit card usage
- Making regular monthly repayments
- Increase in annual income
- Decrease in liabilities
While using credit card it is important to understand how the credit limit works. Having an ample credit card limit is always beneficial especially in cases of emergency but if you have a low credit limit then you can always work upon increasing the credit card limit. But remember increased credit card limit is an opportunity for a good credit score and not an opportunity of spending more than what you should. Thus, make wise use of the credit limit, keep a check on your usage and do the repayment of the utilized money on time every month.