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What is Credit Card Limit - Explained By Experts

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September 29, 2022

Summary

What’s Inside

Credit limits play a crucial role in managing personal finances. They determine the maximum amount of credit a person can borrow, helping individuals maintain financial discipline and avoid excessive debt. If you’ve been toying with the idea of finally applying for a credit card, the first thing you need to understand is credit card limits.

What is a credit card limit?

A credit limit is the cap set by banks on the amount of money that you can spend. Once you reach the maximum credit limit that your card allows, you won’t be able to use your card until all outstanding dues are cleared.

Certain credit card issuers allow you to use your credit card beyond the credit limit. However, doing so will result in the levy of a penalty known as the ‘over-limit fee’ which may result in you incurring additional fees on your spends.

How do credit limits work?

Assume that you’ve applied for a credit card with a bank, after assessing your application and a multitude of factors, the bank approves your application for a credit card with a limit of ₹2 lakhs. By the end of the first month, you spend about ₹1.8 lakhs on your credit card, leaving you with  an available credit card limit of just ₹20,000. 

Now, let’s say that you wish to use your credit card again for making purchases over the amount of ₹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 ₹1.8 lakhs, your credit limit would be restored to ₹2 lakhs, enabling you to use your card normally without incurring any penalties. 

Factors considered when setting a credit limit

The credit limit is decided entirely by the credit card issuing company. This decision is made based on certain factors, let's dive into the most important ones.

1. Credit score

This is arguably one of the most critical factors 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.

2. Current income level 

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. 

3. Existing debt obligations 

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.

4. Age 

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. 

Increasing credit card limit

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 submit your income statement to the bank & request a credit limit upgrade.

Using up your entire credit card limit

A question you may have is if it is advisable to use up your entire credit card limit.

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.

A credit utilisation ratio of more than 35% can reduce your credit score. This means that if your credit utilisation ratio is 100%, it can lower your credit score.

Conclusion

In conclusion, understanding credit card limits is essential before applying for a credit card. Factors such as credit score, income level, debt obligations, and age influence the credit limit set by card issuers. While it is possible to increase the limit over time, it is advisable to maintain a low credit utilisation ratio to preserve a healthy credit score. 

The Credit Analyser on Fi is a great way to not only view your credit score, but also get insights about the factors that influence your credit score. This will help you tweak your financial actions accordingly so that you can subsequently increase your credit score.

Learn more about how to optimise your credit card limit here.

Frequently Asked Questions

1. How to find the credit limit of a credit card?

Fortunately, there are multiple through which you can find out what the credit card limit for your card is. Either 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. 

2. Can I increase my credit card limit?

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. 

3. Can over-limit fee be waived in credit cards?

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.

4. How do I remove the over-limit fee from my credit card?

The best way to do this is by not overspending 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 transactions through your card if you cross the card limit.

Disclaimer

Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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