With digital payments becoming prevalent and getting loans easy, credit cards are everyone's go-to option for going cashless. But to use it to your benefit, you first need to know what is a credit limit.

Understanding the significance of your credit limit can be the stepping stone to better management of your personal finance. Managing credit limits properly can also positively impact your overall credit score.

This, in turn, will help you when applying for loans for various purposes.

So, here is everything you need to know to understand what is a credit limit and how to optimize it fully.

What is a Credit Limit?

Credit limits are usually applied to a credit card user or customer by the lending financial institution, such as banks and non-banking financial companies (NBFCs). This usually applies to a credit card and, in some cases, to a credit line.

Simply put, it is the maximum amount of money a credit card user can spend or borrow from a lender in a given period. Any person seeking credit gets allotted a specific credit limit based on their previous financial transactions, such as loans, repayment history, monthly income, etc.

How Does a Credit Limit Work?

Once you get approved for credit cards, it automatically comes with pre-approved credit limits. The available limit primarily determines your spending capacity within a specific time.

Once you start spending via the credit card, your available spending amount gets deducted from the credit limit.

For instance, if you hold a card with a credit limit of Rs. 65000 and spend Rs. 19500 in a month, the remaining balance would be Rs. 45500. It is a good practice to never go overboard with spending and remain within the credit limits.

Is It Possible to Spend Beyond the Credit Limits?

This usually depends on the discretion of the lender. Most financial institutions do not allow users to spend beyond their credit limits. However, in some cases, you may be able to do it.

However, it is highly recommended that you don't. There are primarily two reasons for this:

• Exorbitant fees: Spending above your allocated credit limit can incur additional charges in the form of an over-limit fee. Although using credit cards allows users to avail of "interest-free" loans for a limited time, going beyond the limit can be counter-productive.
• Negative impact on credit score: Your credit score depends on numerous factors, including credit utilization. Spending above the stipulated credit limits results in high credit utilization, which reduces your credit score. Ideally, one should not spend more than 30% of their overall credit limit.

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Frequently Asked Questions

1. Is a credit limit monthly?

Yes, your credit limits get renewed every month after the due payment date. Once you repay the borrowed money, the limit increases to its total amount.

2. How much should the credit limit be?

There is no fixed rule for a credit limit. It ultimately depends on the lender. Usually, lenders may increase your limit over time based on your credit score, repayment history and credit utilization. Using your credit card responsibly can eventually help you increase the limit and improve your overall credit score.

Learn more about getting your first credit card here: https://www.youtube.com/shorts/rTdsmKpDlEQ