Navigating the world of Credit Cards can be a little challenging, especially when it comes to understanding the nuances of credit limit. Whether you are a seasoned cardholder or new to credit, it is crucial to grasp the concept of Credit Card limits. In this comprehensive guide, we will explore card limits, including their meaning, impact on credit scores, and more.
What is Credit Card limit?
A Credit Card limit, often referred to as a credit limit, is the maximum amount that a Credit Card company allows you to borrow on a single card. This limit is set based on several factors, including your credit history, income, and the card issuer's policies. It is a crucial component in managing your finances, as it determines how much money you can spend using the card.
How is Credit Card limit arrived at?
Credit Card issuers consider multiple factors when determining your credit limit. Key aspects include your credit score, repayment history, current income and existing debt. A higher credit score and a stable income typically lead to a higher credit limit, whereas a lower score and uncertain income might result in a lower credit limit on your card.
Also Read: Credit Cards: Six reasons why you should have a credit card
Impact of Credit Card limit on credit score
Your Credit Card limit plays a significant role on your credit score. A critical factor is the credit utilisation ratio, which is the amount of credit you are using compared to your total credit limit. Maintaining a low credit utilisation ratio (ideally below 30%) can positively impact your credit score. Conversely, maxing out your credit limit can harm your score. In other words, if you have a higher Credit Card limit as compared to your regular usage, then your credit utilisation ratio continues to be low, which in turn has a positive impact on your credit score.
Ways to increase the credit limit
Your credit limit is linked to your Credit Card usage. Sometimes your bank may increase your credit limit if you are a regular user and have a good repayment track record.
Benefits of credit card increase
A credit limit increase can be a wise move, especially if your financial situation has improved.
An increased credit limit can lower your credit utilisation ratio, potentially boosting your credit score.
Also Read: 6 benefits of using a Credit Card
Difference between total credit limit and available credit limit
The total credit limit represents the maximum amount that you can spend using your Credit Card. This limit is set based on your income, credit score, and credit history. For instance, a higher credit score and high income might result in a higher credit limit. It is important to note that this limit is a guideline for the upper boundary of your borrowing capacity.
On the other hand, the available credit limit is what you can use at any given moment. It is the difference between your total credit limit and the amount you have already spent (and not yet repaid) on your Credit Card. For example, if you have a total credit limit of ₹1 lakh and you have spent ₹20,000 already, your available credit limit would be ₹80,000. This figure fluctuates as you make new purchases and repayments.
The gap between these two limits is a key financial indicator. A high utilisation of your credit limit (a smaller gap) can negatively affect your credit score, as it may suggest over-reliance on credit. In contrast, a lower utilisation ratio (a larger gap) is generally viewed as favourable, as it indicates responsible credit usage. Managing this balance effectively is essential for maintaining a healthy credit profile.
Conclusion
Understanding the nuances of total credit limit versus available credit limit not only helps in maintaining a healthy credit score but also ensures that you make the most out of your card.
Axis Bank Credit Cards stand out in offering a plethora of benefits. Using a Credit Card is not just about spending; it is about spending wisely and reaping the rewards that come with it. Remember the importance of understanding your credit limits and consider the added advantages that come with cards, especially if dining and lifestyle perks align with your interests.
FAQs
Is increasing credit card limit good?
Yes. One benefit is that you get a higher limit to spend. Second benefit is that it can help you keep your credit utilisation at a lower level, which in turn has a positive impact on your credit score
What happens if I exceed my credit limit?
Your bank may allow you to spend a certain limit over and above your credit limit, subject to charges. These charges will be mentioned in your Credit Card’s terms and conditions. Read them carefully before using your Credit Card.
Why was my credit limit increase request denied?
If you have not submitted any proof of income increase of if you have delayed or missed your Credit Card repayments, then there are chances that your request for a credit limit increase may be denied.
How much will my credit limit be?
Your credit limit will depend on your income and credit score and is fixed when you apply for your Credit Card. It may increase later with regular Credit Card usage.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
