Sun. May 19th, 2024
credit card limit

Credit cards are valuable tools that help people maintain their financial stability. One gets a pre-decided credit balance to use via their credit card. But, have you ever wondered how the amount one can spend via a credit card is decided? One should know that credit card issuers offer a credit limit to each user. The credit limit of any user is determined based on numerous factors. As a responsible credit card user, one should know what goes behind deciding the credit card limit. By understanding the responsible factors, one can find ways to increase their credit limit. Read on to know how banks determine the credit limit of a credit card user.

Understanding the credit limit

The credit limit is defined as the available balance on a credit card that can be used for making payments. The credit limit is decided by the respective credit card issuer. Credit card users will also know the available limit on their card in advance. One cannot go beyond the available credit limit while making payments via their credit card. One has to spend within the credit limit in an ideal scenario. Some banks allow users to go a little beyond their credit limit in a billing cycle. However, one has to pay extra fees to the credit card issuer for going beyond the credit limit. Whatever amount one spends from their credit limit is to be repaid at the end of the billing cycle. Now, let us see the factors that help decide the credit limit of any user.

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Factors used for deciding the credit limit of a user

Banks rely on numerous factors to decide the credit limit of a user. Usually, the credit limit calculation is done internally by the banks/credit card issuers. Also, the criteria for deciding the credit limit can change from one credit card issuer to another. Some factors used by banks to determine the credit limit of a user are as follows:

Credit history and score

Banks cannot offer a credit card to any stranger. Banks conduct a preliminary analysis before providing a credit card to the user. Usually, banks check for the user’s credit history before offering a credit card. The credit history of a user will include all the past loans and credit card uses. If someone hasn’t paid the past loans or credit card bills timely, it will be reflected in the credit history. Based on the credit history of the user, banks decide the card limit. To get credit card in India, one has to go through the risk identification process.

Banks have to identify the risk associated with a user before approving a credit card application. A user with minimum credit risk is likely to pay the credit card bills timely. Banks check the credit history of a user to identify the creditworthiness. A user with a good credit history will get a higher credit limit. It is because the credit card issuer will believe the user can pay the credit card bills timely. If someone hasn’t paid past bills timely, they will have a bad credit report. In such a case, banks will not offer a higher credit limit to the user. Similarly, the credit score of a user also plays a role in deciding the credit limit. A user with a higher credit score (more than 700) will get more credit to spend from the issuer. As you pay bills/loans timely, your credit score keeps on improving.

Having no credit history is equal to having a bad credit history. It is because banks don’t know your creditworthiness and have no way of judging it. Also, one will have a lower credit score by having no credit history. Therefore, one should ensure a healthy credit history to convey their creditworthiness to the credit card issuer.

User income

The applicant’s monthly income also plays a role in deciding the approved credit limit. If someone has steady employment, banks believe that they pay the credit card bills timely. Apart from income, debts also play a role in deciding the credit limit. A person with more debt than income will not get a higher credit limit on their card. Therefore, one should maintain a healthy debt-to-income ratio to unlock higher limits on credit cards.

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The credit limit on other cards

One person can apply for more than one credit card. If someone has applied for numerous credit cards from the same bank, the limit on other credit cards can help decide the new credit card limit. However, if one applies for a credit card from a different bank, the limit on the previous card may not help.

You are also told the maximum credit limit when you get a credit card. So spend wisely and pay credit card bills in a timely manner to increase the credit limit!  

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