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A credit limit is the maximum amount a bank or financial institution permits you to borrow or spend using your credit card. It acts as a financial boundary that helps you control your expenses and avoid accumulating excessive debt. Far from being a random figure, this value is carefully calculated by the issuer after assessing your overall financial profile and creditworthiness. For consumers, understanding this limit is essential not only for managing day-to-day spending but also for building a strong credit history.
The credit limit is a value that empowers you by helping you maintain a healthy credit utilisation ratio, which can positively influence your credit score. As credit awareness grows in India, mastering this concept is a vital step towards responsible financial management and improved borrowing power. By understanding this value on your credit card, you can avoid overspending and reduce debt stress.
This knowledge also enables you to make informed decisions when applying for loans or credit cards, increasing your chances of approval and better interest rates. Ultimately, being aware of this limit fosters financial discipline and helps you achieve long-term financial goals with confidence.
Credit card issuers consider several key factors when deciding your credit limit. These include:
Your monthly or annual income is a major factor. Typically, your credit limit ranges from two to three times your monthly income. For example, if you earn ₹50,000 per month, the limit may be between ₹1,00,000 and ₹1,50,000. A stable and higher income generally results in an increased credit card limit.
Your past borrowing behaviour, repayment punctuality, and overall creditworthiness are crucial. A good credit score (usually above 750 on CIBIL in India) and a clean repayment record increase your chances of receiving a higher credit limit on your credit card. This also means that maintaining a good credit score can positively impact your credit limit.
Banks assess your current outstanding loans and credit card balances. If you have high existing debt, your credit limit may be lower as you are seen as a higher risk borrower.
Consistent on-time payments and full repayment of previous credit card bills demonstrate financial discipline, encouraging issuers to offer a higher limit.
A steady job or stable business income with no gaps reassures lenders about your repayment capacity, positively influencing your credit limit.
Different banks and credit card companies have their own internal criteria and risk appetite. Your relationship history with the provider can also impact the limit offered.
Note: It is also important to note that you can check your credit limit easily through your bank’s online portal or mobile app, allowing you to stay informed about your available spending power.
Your credit limit directly determines your available purchasing power. The higher this limit, the more you can spend on your card without exceeding the limit. This flexibility is particularly useful for managing large or unexpected expenses.
Using your credit card wisely can help maintain a healthy credit utilisation ratio, which is the percentage of the limit permitted for you to actually use. Experts recommend keeping this ratio below 30% to maintain a good credit score. For instance, if your credit limit is ₹1,00,000, try not to carry a balance exceeding ₹30,000 at any time.
A higher credit limit also means your credit utilisation ratio naturally lowers if your spending remains constant, which can improve your credit score over time. However, it is crucial to avoid the temptation to overspend just because you have a higher limit.
If you exceed your credit limit, your transactions may be declined, and you could face penalties such as over-limit fees. Additionally, exceeding your limit negatively impacts your credit score by increasing your credit utilisation ratio.
Your credit limit is determined by a combination of several critical factors that reflect your overall financial health and repayment capacity. These factors are as follows:
Higher income supports a higher credit limit.
A strong credit score signals reliability to lenders.
Timely repayments demonstrate financial discipline.
Lower existing debt can increase your credit limit.
Consistent employment reassures lenders.
Long-term customers may receive better limits.
If you wish to increase your credit limit, consider the following steps:
Maintain a good repayment record on your current credit card.
Use your card regularly but keep your utilisation low.
Request a credit limit increase through your bank’s app, website, or customer service.
Provide updated income proof if required.
Avoid frequent requests, as multiple inquiries within a short period can negatively affect your credit score.
Increasing your credit limit can offer greater financial flexibility and improve your credit score. It may also tempt you to overspend or lead to higher interest charges if not managed responsibly.
Here’s a clear overview of the pros and cons to help you make an informed decision:
Pros |
Cons |
|---|---|
More spending power for emergencies |
Risk of overspending and accumulating debt |
Lower credit utilisation ratio improves credit score |
Higher temptation to spend beyond means |
Can improve credit score if used responsibly |
Potential for increased minimum payments |
Exceeding your credit limit can trigger a chain of costly and inconvenient consequences, affecting your finances and creditworthiness in multiple ways. Here’s a detailed look at what could happen:
If you spend more than your credit limit, your bank may charge an over-limit fee, usually a fixed amount or a small percentage of the extra amount spent. For example, many banks charge around ₹500 plus GST as a penalty. This fee is added to your outstanding balance, increasing your overall debt. However, banks cannot charge this fee without your prior consent, and you can choose to block transactions that exceed your limit to avoid such charges.
When you go over your credit limit, the excess amount may attract a higher interest rate than your usual card rate. This means the extra balance will cost you more in interest charges if not paid off quickly. Over-limit spending can make your credit card debt more expensive, so it’s important to stay within your limit to avoid these additional costs.
Exceeding your credit limit doesn’t directly get reported to credit bureaus, but it increases your credit utilisation ratio—the percentage of your available credit you’re using. A high utilisation ratio (above 30%) signals financial stress to lenders and can lower your credit score over time. Regularly going over your limit can damage your creditworthiness and make it harder to get loans or credit in the future.
If you exceed your credit limit and have not given permission for over-limit spending, your bank may decline further transactions until you reduce your outstanding balance. This means any new purchases or payments will be rejected, which can be inconvenient, especially during emergencies. Many banks offer tools to alert you before you reach your limit, helping you avoid declined transactions.
Exceeding your credit limit can have significant financial consequences, from additional fees and higher interest rates to a negative impact on your credit score and potential transaction declines. By managing your spending carefully and monitoring your credit usage, you can protect your creditworthiness and ensure your credit card remains a valuable financial tool rather than a source of stress.
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Posted on 16 May
Roshani Ballal
Academy by Bajaj Markets
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