The credit limit on your credit card is the maximum balance given to you by the issuer. By setting a credit limit, the bank controls your purchasing power with the card. At the same time, the set credit limit helps you maintain a good credit score. The credit utilization ratio, which is the ratio of your credit card balance to the credit limit allowed, plays a very important role in determining your credit score. Higher the credit utilization, lower will be your credit score.
So, how is this credit limit decided by the banks?
Different credit card issuers have different criteria of calculating the credit limit to be granted to an individual applicant. But there are a few common elements that help the banks decide the credit limit. Let us discuss these elements in some detail.
This is the first thing that banks and other credit card issuers check before approving your application. Your credit score also helps them decide the credit limit on your card. Remember, for the bank you are a total stranger asking for money and by giving you a credit card they are taking a risk. So they decide the credit limit on the basis of how good a risk you are for them.
If you have been a disciplined borrower in the past and are able to maintain a good credit score over a long period, it is more likely that you will get a higher credit limit. On the other hand, if you have had reckless credit behaviour in the past, banks may not be willing to give you a higher credit limit.
You must remember that having no credit history can be equally harmful as there is no previous data that the banks can rely on. Credit card providers approach credit bureaus like TransUnion CIBIL, Experian and Equifax to know the applicant’s credit score and grant the credit limit accordingly.
Income and Debts
The next thing that the banks consider for determining your credit card limit is your income. It is quite simple- the amount of income you generate will affect the amount of debt that you can afford to pay. But this does not mean that a higher income will give you a higher credit limit. Banks do not just consider your income for the purpose but they look at your debt-to-income ratio.
The amount of your existing debts and how you manage them will also play an important role in deciding the credit limit of your card. The higher your debt-to-income ratio, lower will be the limit on your new credit card. And this is where the credit utilization also comes into play. If you have a lot of unused credit on existing cards, it presents you as a credit responsible person who makes disciplined use of his available credit. Banks consider this to be a positive sign and may be ready to grant you a higher credit limit.
Limits on Other Credit Cards
Banks also take cues from other banks and credit card providers when setting a limit on your credit card. So the limit on your existing credit cards will also help in deciding the limit on your new card. For example, if you have been given a 50,000 limit on your HDFC credit card, it will be difficult to get approved for a 2,00,000 limit right away on an American Express Credit Card. However, if you are already a member of another bank’s elite group of customers, it will be easier for you to get high credit limit on your new card.
Type of Credit Cards
Different credit cards come with different features and allow a specific credit limit regardless of the other factors as mentioned above. For instance, a card that belongs to the elite/premium list starts with a particular credit limit so you will naturally get a higher limit on it. But if you apply for a basic card instead, you might not get a high limit even if your income and credit score is good. This is because the maximum limit on the basic card is set at a low value by the issuer. The limit will also vary if you have applied for co-branded cards or a credit card secured against your fixed deposit.
Besides the factors mentioned above, banks may also consider some non-income based factors such as your shopping behaviour like where you frequently shop for groceries, whether you are a frequent traveller or you love fine dine. This is especially applied when you wish to take a co-branded credit card. Say you have applied for a co-branded credit card with a travel brand; the bank will monitor your previous travel expenses and grant the credit limit accordingly.
The above important essentials, combined with specific elements like the bank’s credit policy, will help in shaping the credit limit allowed on your card.