Credit Limit is the maximum amount that you can spend using your credit card at any given time. It is the credit usage limit set by your credit card issuer on the card issued. Managing your credit limit is imperative to avoid credit card debt as well as to build a decent credit score. Below we have discussed all aspects related to your credit card limit and how can you increase the same.
What is Credit Card Limit?
Credit Limit is the predefined purchase limit set by your bank or credit card company on a particular credit card. The credit limit is basically the maximum amount you can spend using your credit card.
For example, if your bank provides you with a credit card limit of Rs.40,000, you cannot spend beyond this limit. If done you will be charged an over-limit fee for the same. It is to be noted that the credit limit varies on the type of credit card chosen and depends on certain factors including spending habits, income, eligibility, credit history and more.
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 including-
- Your income and age
- Repayment Capacity
- Credit History
- Credit Score
All these factors have a major impact on your credit card limit. Also if you’re applying for a credit card for the first time, you will likely get a low credit limit. But if you use your card wisely and make your payments in full and on time, the bank will give you the option to increase the credit limit on your card.
Total Credit Limit Vs Available Credit Limit
Total Credit Limit is the maximum limit you can avail on your credit card. Ongoing beyond this limit, the bank will levy a penalty in the form of an over-limit fee.
Available Credit Limit is the credit amount that is available for purchases as on the specified date.
For example, Suppose you have an HDFC Credit Card with a total credit limit of Rs.60,000. It means that Rs.60,000 amount is the total amount that you can spend using your credit card.
Assume that you spend Rs.25,000 in a given month. Then your available credit card limit will be Rs.35,000. It is to be noted that when you make payments every month, your credit limit increases by that amount and so does your available credit limit.
How does credit card limit affect your credit score?
A credit score is an analysis of your credit history represented in a numerical manner. It is utilized to determine your creditworthiness. Higher the credit score, higher will be your creditworthiness and vice versa. Usage of the 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, the credit utilization ratio within the range of 10% to 30% is considered decent. To keep your credit score high, you need to use your 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 (in full and on time)
- Finding alternative sources of income
- Decreasing additional liabilities
Suggested Read: How Credit Cards affect Your Credit Score
How much of your Credit Card Limit Can You Use?
While using a credit card it is important to understand how the credit limit works. 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.
Your credit utilisation ratio looks at how much of the available credit limit you tend to use. If your credit utilisation ratio is high, lenders might think of you as credit hungry which in turn can adversely affect your credit score, making it difficult for you to get a loan in future.
However, a lower credit utilisation ratio simply means that you know how to manage your finances well and you have a decent hold on your repayment capacity. Let’s understand credit utilisation ratio with an example-
|Suppose you have an SBI Credit Card with a credit limit of Rs.70,000. You spent Rs.35,000 using your card in the month of June. Your credit utilisation ratio will be 50% [(35,000 / 70,000 X 100], which is much higher than the advisable percentage. This credit utilisation ratio of 50% can adversely affect your credit score.|
How to increase credit card limit?
Usually, banks keep a close check on an individual’s credit card usages and decide whether a particular cardholder should be allowed a higher credit limit. If you are eligible, the bank will inform you about the same on your registered mobile number or e-mail ID. You can increase your credit limit in the following ways-
- Use your credit card wisely- It is advisable to use your credit card regularly and not exceed the credit utilisation ratio. You should keep your credit utilisation ratio below 30%.
- Request your bank for credit limit increase- You can also request your bank for credit limit increase. Majority of the banks agree to do so depending on the reason you provided. You can request for the same via net banking or by visiting the nearest branch.
- Apply for a new credit card-You also have the option to apply for a new credit card with a higher credit limit than your current one.
- Pay your bills timely- If you are regular and timely in making your credit card payments, the bank will automatically increase your credit limit.
Advantages of Increasing Credit Limit on your Card
Following mentioned are some of the benefits of increasing credit limit on your credit card-
- Lower your credit utilisation ratio- Increased limit can help in lowering your credit utilisation ratio. The lower the credit utilisation ratio, the higher your credit score
- Makes it convenient to get a loan- A balance of high credit limit and low credit utilisation ratio lets banks consider you favourably. This way you tend to easily get approved for a loan
- Helpful during emergency situations- A high credit limit often comes helpful in financial as well as health emergencies
- More perks and additional benefits- Majority of the credit cards with high credit limit provide more perks and benefits as compared to the one with a relatively lower credit limit
Impact of making a transaction Over the Credit Limit
If you make a transaction over the credit limit, you will not only be levied an over-limit fee but using the over-limit facility can have a negative impact on your credit score. Moreover, it also reduces your chances of getting approved for a loan during financial emergencies
What happens if you convert your purchase to EMIs?
If you make an over-limit transaction and decide to convert it into EMIs, your actual credit limit will be blocked in such case. Let’s understand this with an example-
Suppose you have Rs.10,000 credit limit left and you decide to make a purchase of Rs.20,000 and then convert the over-limit transaction into EMIs. After making this purchase of Rs.20,000, you will exceed your credit limit by Rs.10,000. Hence you will be charged an over-limit fee of 3% of the over-limit amount. Even though you convert the purchase into EMIs, your exceeded limit of Rs.10,000 along with the available limit of Rs.10,000 will be blocked. Only after paying your EMIs by the due date, your credit limit will be released.
Frequently Asked Questions (FAQs)
How do I check if I am eligible for a Pre-approved Credit limit increase offer?
Though all eligible customers are informed via SMS, alternatively you can also check your eligibility for a Pre-approved credit increase offer via net banking or by contacting the customer care of your respective bank.
What is Cash limit?
Cash Limit is the amount included in the credit limit assigned to your card account that can be withdrawn as cash.
How much of the Credit Limit can I use?
You can make transactions all the way up to your credit limit, but you may not be able to go beyond your credit limit, particularly if you haven’t opted-in to having over-limit transactions processed.
How much will my credit limit be?
Your credit card issuer determines your credit limit when you first apply for the credit card. They will assess your income, current debt level, and credit history and set a credit limit based on these factors.
What happens if I exceed my credit limit?
If your transaction is not declined, you will be charged an over-limit fee.
Why was my credit limit increase request denied?
There could be many reasons why your credit limit increase may have been denied. Many such reasons include low income, decreased utilisation of credit card or default payments.