If you’re planning to apply for a credit card soon, you need to know what a credit card limit means. The card issuer sets this limit after considering a host of different factors. Here’s everything you need to know about the credit limit, how it works, and what you can do to increase it.
When issuing credit cards, banks usually tend to cap the amount of money you can spend. This cap that banks set on credit cards is what is known as the credit limit. Once you reach the maximum credit limit allowed on your card, you won’t be able to use your card till you clear your outstanding dues.
Some credit card issuers allow you to use your credit card above and beyond their credit limit. However, doing so will result in the levy of a penalty known as the ‘over-limit fee’ and may result in you incurring interest/fees on your purchases.
Now that you’re aware of the meaning of credit limit, let’s take a look at how it works. Here’s an example to help you understand the concept.
Assume that you’ve applied for a credit card with a bank. After assessing your application and a multitude of factors, the bank grants you a card with a limit of Rs. 2 lakhs. By the end of the first month, you spend about Rs. 1.8 lakhs on your credit card. This leaves you with an available credit card limit of just Rs. 20,000.
Now, let’s say that you wish to use your credit card again for making purchases of more than Rs. 20,000. What do you do? Depending on the card issuer, either such transactions will be declined or you will be charged an over-limit fee and interest.
However, if you were to clear the outstanding dues of Rs. 1.8 lakhs, your credit limit would be restored to Rs. 2 lakhs, enabling you to use your card normally without incurring any penalties.
As an individual, you can't predict what the maximum credit card limit for you is likely to be. It is entirely up to the credit card issuing company. That said, a few factors are taken into consideration when setting a credit limit. Here's a quick look at a few of the most important ones.
This is arguably the most critical factor that determines your credit card limit. The higher your credit score, the higher your credit limit is likely to be. Card issuers tend to view individuals with a high credit score more favourably — i.e. if you have a credit score of at least 700 or above, the chances of you getting a high credit limit increase.
Your income is another major factor that's taken into consideration by card issuers. Usually, issuing companies set a percentage of your annual income as the maximum credit card limit. Therefore, the higher your income, the higher your credit limit.
The number of debt obligations that you have currently can also play a huge role in determining your credit limit. The more debt you have, the lower the card limit is likely to be. So, even if your income levels are high, you may still have a low credit limit if your debt obligations are too high.
Although a minor factor, your age is also taken into consideration by card issuers when setting your credit card limit. Younger individuals usually tend to get higher credit limits than older individuals.
Fortunately, your credit card limit is not permanent. Your card issuer may periodically increase your card limit based on your usage and repayment pattern.
Alternatively, if your income levels have increased since you first got your card, you can also request to increase the limit. You can submit your income statement to the bank & request a credit limit upgrade.
You’re already aware that you can use up your entire credit limit. But is it advisable to do so?
One of the primary factors considered when determining your credit score is your credit utilisation ratio. This financial metric tells you just how much of your credit you’ve utilised as opposed to the total available credit card limit. For instance, if your credit utilisation ratio is 50%, you’ve used up 50% of your maximum credit card limit.
A credit utilisation ratio of more than 35% can reduce your credit score. So, if you use up your entire credit limit, your credit utilisation ratio would be 100%, which can lower your credit score.
Even if your usage is low, it is always a good idea to have a high credit card limit. It can come in handy during emergencies where you might need funds urgently. However, if you plan on applying for a credit card soon, ensure you have a good enough credit score. It will ensure that you get a high credit limit. If you find that your score is less than ideal, it may be a good idea to work on improving your credit score before applying for the card.
Fortunately, there are multiple through which you can find out what the credit card limit for your card is. Firstly, you can look at the welcome kit the card arrived in. It usually contains information regarding your credit card, including the maximum limit. Alternatively, you can log into your credit card account to check your limit. Or, you can get in touch with the customer care of the card issuing company.
Yes, of course. If your income has recently increased, you can increase your credit limit by submitting your latest income statement with the card issuing bank. Alternatively, you can also apply for a new credit card to increase your maximum credit card limit.
Yes, the over limit fee can be waived off in credit cards. You'd need to speak with your bank and ensure you don't get charged for crossing credit limit, and instead your card doesn't go through with transactions once you cross the card limit.
The best way to do this is by trying to not overspend and clearing your dues in full. But if you have a habit of overspending on your credit card, you could get in touch with your bank and ask them to remove the over limit fee. Instead, they can stop transacation through your card if you cross the card limit.