When you avail of a traditional installment loan, the lending institution determines upfront how much money it will loan you. Later, you pay back the loan amount with an interest rate attached to it, over a predetermined period of time.
On the other hand, the functionalities of a credit card are different. While using a credit card, you can borrow money, pay down your balance and borrow money again. You can rinse and repeat this procedure as frequently as you please; provide your bank accounts are accessible and in good standing.
Even though applying for a credit card open up the possibility of borrowing money with ease and flexibility, there are certain restrictions to be aware of, one being the credit card limit. Additionally, before diving into everything to know about the credit limit, you need to figure out which card suits the best for your lifestyle and apply for a credit card online.
About Credit Card Limit
Credit Card limit if not familiar with it, can be a little mystifying. This is when you are not acquainted with the factors involved in determining it and how it impacts your credit life, for instance, your credit score. However, with a step-wise guide, this can easily be demystified.
After applying for a credit card, the credit limit is the absolute maximum balance permitted to have on your credit card, at a given point of time. The size of the credit limit is proportional to the purchasing power of that credit card- the bigger the credit limit, the more you can purchase. Each time you make a purchase, the expenditure amount gets added to the credit card balance. On reaching the credit limit, the creditor invalidates further spends until some of the outstanding amounts are paid off. Also, a low credit card limit implies the lack of room and possibility to make additional spends without negatively impacting the credit limit.
5 Factors Impacting the Credit Card Limit to be Aware of
Credit card issuers, who primarily decide on your credit limit- after you apply for a credit card- usually do elucidate on the factors that influence the credit card limit; however, how they evaluate and determine this limit is proprietary. Let’s dig into the factors one-by-one to have a better understanding of the best practices to keep in mind after applying for a credit card. Given below are the 5 factors to help you get closer to this goal.
- Credit Score: This score ranging between 300-900 controls the creditworthiness of an individual. Closer the score to 900, the better it is for your credit limit. This is because 30% of the credit score considers the factor known as credit utilization- the ratio between the credit card balance and the credit card limit. The larger this ratio, the smaller the credit score- which further implies that you are using up more of your credit limit
- Hard Enquiry Status: Also know as hard pulls, this occurs when a creditor checks upon your credit status prior to making a lending decision. This commonly occurs while applying for a mortgage or a loan or again applying for a credit card. If you apply for a credit card or loans with multiple banks in the same month, this will not only negatively impact the credit score but also will indicate a credit hungry behavior that enables credit institutions to predict your repayment behavior. Thus, this further impacts the credit limit
- Monthly Income Status: The standard credit limit is usually the higher multiple of an individual’s monthly income. For instance, with a monthly salary of 75,000 and up, you can expect a credit limit ranging between INR 1.5-2 lakhs. For a self-employed individual, on filing an overall income of INR 6 lakhs for the previous financial year, a credit limit of INR 1-2 lakhs can be expected
- Existing Loans & EMI: The repayment status of any existing loans and monthly EMIs also influence the credit limit. Suppose if more than half of the monthly salary goes out in paying EMIs, it naturally insinuates your incapability to pay other bills as the cash flow is reduced by half. Henceforth, this factor can be a massive blow to the credit limit as the credit will consider the outstanding income (minus the monthly spends on repaying the EMI) while issuing the credit limit. So striking a balance here on a first-hand basis, would help to improve on the credit limit
- Credit Card Portfolio: A credit card portfolio helps the lending institution to assess the current status of your wallet. This is a crucial aspect while applying for a credit card as this is based on the existing savings and salary account transactions. Credit issuers not only look into the transaction history but also into other products that have had been availed from the bank. For instance, if you are using any insurance or investment plans from the same bank, your credit limit will be positively impacted as it implies a good relationship value with the institution. Your credit card portfolio should be designed in a way such that it provides access to credit- improving on the credit limit- and also curbing any fraudulent activity, thus building a good credit score
Bottom Line: Credit Limit Matters!
Credit cards are indispensable while functioning in an era of constant digitalization and technology modernization. It frames out the modern financial lifestyle, so using them responsibly is essential. The credit limit is becoming a determining factor in corroborating how accountable you are with your credit. Planning out on your monthly spends and sticking to it can help improve your credit limit thus also increasing the credit score. This, in turn, helps resolve in future complications in financial ventures such as requesting a mortgage or a loan- thus making you worry less about the outcome of hard inquiries. Having a reasonable credit limit gives the flexibility to spend when you need to, and limit the risk of lending money. Spending 30% or less of the credit limit is a good practice, to avoid running into debts. Now you can apply for a credit card without worrying too much about the credit limit!