What is a Credit Limit: After purchasing your credit card, your issuing bank assigns the maximum amount that you can spend using your credit card. It is known as the credit limit. It is advisable to spend about 30% of the credit limit and avoid going beyond the assigned credit limit if you wish to secure a good credit score.
Credit card limit
Your credit card limit is the pre-defined purchase limit set by your issuing bank on your credit card. It is the maximum amount that you can spend using your credit card. For instance, if the issuing bank has set a credit limit of Rs. 100,000/- on your credit card, then it would be wise not to cross this limit. However, if you overspend and go beyond the assigned limit, you will have to incur high over-limit charges, which is a certain percentage of the over-limit amount. In worst cases, your issuing bank can block your card, and your credit score will significantly drop.
The factors that affect your credit limit are your income, credit score, type of credit card, and the issuing bank’s credit card eligibility requirements.
How is your credit limit determined?
Your credit card limit is decided by the issuing bank or the credit card company when you apply for a credit card. Here are the crucial components considered while determining your credit card limit:
- Current financial obligations – liabilities
- Credit history
- Credit score
The said factors have a direct impact on your credit limit. It is worth noting that if you are applying for a credit card for the first time, you will have a lower credit limit than someone who has been using a credit card for quite some time. If you use your credit card wisely and make on-time repayments, your credit card issuer will consider increasing your credit limit.
How does your credit card limit affect your credit score?
Your credit score is a three-digit number that is an analysis of your credit history. It is one of the crucial factors considered by the issuing bank to determine whether or not you are a creditworthy person. The closer your credit score is to the 900 range, the higher will be your creditworthiness. When you use your credit limit, it affects your credit score, as your credit limit and credit utilization are reported to the Bureau of Credit at the end of every month. Your credit utilization is calculated based on the total balances and the credit limit on your credit card.
To keep a decent credit utilization ratio, you will have to keep within the range of 20% to 30%. You will have to ensure that your credit utilization ratio does not go beyond the 30% limit. If it does, it will negatively affect your credit score. So, use your credit limit wisely and always avoid overspending with your credit card.
Here are the top ways to keep a healthy credit score:
- While using a credit card to make purchases, make sure to keep its usage to a bare minimum.
- Always repay your outstanding bills in full and on time.
- Look for alternative sources of income.
- If you have current financial obligations, make sure to pay them off as soon as possible. Also, avoid taking new loans.
How to best utilize your credit card limit?
Before learning how much of your credit card limit you can use, let us understand how it works. It is worth noting that a high credit limit is an opportunity to improve your credit score, not a chance to spend more than you should. If you use more than 50% of your credit limit, you risk hurting your credit score. Furthermore, you can pay your credit bills on time to increase your credit limit.
The credit utilization ratio shows how much of your credit card limit you intend to use. For instance, if the credit utilization ratio is more than 30%, your lender may not consider you a creditworthy borrower. Having a high credit utilization ratio negatively affects your credit score, jeopardizing your plan of securing loans in the future.
Also, if your credit utilization ratio is below 30%, it indicates that you are a responsible borrower, and you know how to manage your finances well. It shows that you have always been able to make on-time repayments. So, while using your credit card, make sure that your credit utilization ratio does not cross the 30% mark.
Keep these things in mind to maintain your credit limit and avail credit easily.