Credit cards are useful for making transactions online and in a variety of stores. Paying with such cards is easy and quick, too. But they come with one disadvantage—the credit card limit. If like many other cardholders, you are frustrated by the limit, this article is for you.
Read on to understand it better and learn how to increase it.
What is a credit card limit?
Every credit card company and bank sets a purchase restriction on their credit cards. Simply put, a credit limit means the highest amount you are allowed to spend using a credit card.
Suppose your credit card has a limit of ₹50,000, you can spend only a maximum of ₹50,000 when using it. If you spend over the limit, your bank might block the card or charge you a percentage of the additional amount spent, as a penalty fee.
This will also negatively affect your credit score.
How is the credit card limit determined?
When you apply for a credit card, the lender decides the limit based on different factors. The key aspects that determine your credit limit are as follows:
- Age
- Income
- Credit history
- Financial liabilities
- Credit score
In addition, if you are getting your first credit card, the financial institution will possibly set a low credit limit on the card. But you will be able to increase it later by paying the bills on time and using it responsibly.
Total credit vs. available credit limit
One aspect about credit cards that might confuse users is the difference between total credit limit and available credit limit. The former is the maximum purchasing power of your card.
If you cross this limit, the bank will charge you a penalty fee. On the other hand, the latter is the amount still available on a particular day after spending money on the card.
Let us assume your credit card has a limit of ₹50,000. Now, this amount is your total credit limit. If you purchase something worth ₹20,000 using the card, your available credit limit will be ₹30,000.
The card limit again increases when you pay the credit card bill on time. However, remember that it increases depending on the bill amount you pay.
Therefore, if you settle the entire amount of ₹20,000, the limit will reset to ₹50,000. But, if you pay only the minimum amount due, the limit will increase accordingly.
How credit limit affects your credit score
The credit score is a numerical representation of your credit history. Lenders estimate your creditworthiness based on your credit score.
If you have a high credit score, it becomes easier to avail of a loan and other deals. On the other hand, a low credit score can make it difficult to get loans.
As credit cards are essentially loans, your usage and repayment behavior affect your credit score. Different credit bureaus keep track of your credit utilization or how much of your credit limit you use every month.
They determine your credit score based on that and a variety of other factors. The bureaus consider 10% to 30% credit utilization as decent, but anything higher than that can hamper your credit score. To maintain a good score, try to limit your card use and pay the entire credit card bill on time.
Ways to increase your credit limit
If you are not satisfied with your credit limit, it is possible to increase it significantly. Check the following list to understand how to increase the limit on credit cards.
- Make a request: This is the easiest approach to increase your card’s limit. The approval of your request depends on many factors like credit score and history, but if you do not ask, you will never know.
- Improve credit score: Your credit score is one of the most crucial factors that determine the credit limit. To increase the limit, you must first improve your credit score by paying your bills and loan equated monthly installments (EMIs) on time. When you have a high score, the bank will increase the credit card limit.
- Pay the bills on time: You need to prove to the credit card company that you can manage using the card and pay your dues on time. If they trust you with the repayments, they will increase the limit. Therefore, start paying your bills before the due date to improve your credibility.
- Ask for a reasonable limit: If you ask for an unreasonably high limit, the chances are that the financial institution will reject the request. So, it is important to be reasonable when you ask for a higher credit limit on your card.
- Update financial information: Your regular income is one of the parameters banks use to estimate the limit on your credit card. Thus, if your income increases, you become eligible to get a higher limit. If your financial situation improves after taking a credit card, you must inform the bank and ask them to increase your credit limit.
Advantages of increasing your credit limit
- Helps during emergencies: Situations like medical emergencies often require you to have access to immediate funds. A credit card with a high limit can be helpful in such circumstances. It enables you to spend more money than you may have during a time of crisis.
- Lowers credit utilization: A higher credit limit allows you to reduce your credit utilization. In turn, this also increases your credit score.
- Makes getting loans easier: When you have a good credit score, low credit utilization ratio, and high credit limit, financial institutions consider you creditworthy. And this makes it easier for you to avail of a loan from them.
Impact of going beyond your credit limit
Going beyond your credit limit has many disadvantages. The financial institution will levy an over-limit charge for paying more than the allowed amount.
Additionally, they may block your credit card. It will also negatively impact your credit score. Moreover, you should be careful when withdrawing cash using your credit card.
It requires you to pay 2.5% of the amount as cash withdrawal charges on the credit card. So, it is better to avoid using credit cards for cash withdrawal and going beyond your limit.
FAQs
1. What is an average credit limit
The credit limit varies among users as it depends on each cardholder’s income, credit score, and other financial factors.
2. Can I increase my credit limit?
Yes, increasing the credit card limit is possible. You may request the financial institution to do so.
3. Does it take long to increase the credit limit?
It depends on your bank or credit card company. But if your documents are in order, the process may take only a few days.
This is a companion discussion topic for the original entry at https://jupiter.money/resources/guide-to-credit-card-limit/