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.
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.
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.
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:
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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.
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