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HomeBusiness NewsHow a Credit Limit is Set And Why Is It Important?

How a Credit Limit is Set And Why Is It Important?

With the help of a credit card, cardholders can make purchases using borrowed funds that they will later have to pay back. However, the amount financed with a credit card is limited. It is referred to as the credit card limit. 

In this post, we will go over how credit limits are determined and why they are significant, particularly when looking for the finest credit card in India.

How Do Credit Limits Work?

The maximum amount of money a cardholder may borrow using their credit card is determined by their credit limit. This cap is set by the credit card company and depends on several variables, including the cardholder’s income, credit history, and financial stability.

The credit limit is not a fixed amount and can be changed over time. Credit card issuers may increase or decrease the credit limit depending on the cardholder’s creditworthiness and spending behaviour.

How is a credit limit set?

Credit card issuers use various methods to determine a cardholder’s credit limit. Some of the common methods include. 

  • Credit score: A person’s creditworthiness is shown numerically by their credit score. Credit card companies use this rating to calculate the limit of credit card for cardholders. With a higher credit score, a borrower has a better chance of repaying the loan and a better credit history. So they have a higher chance of receiving a bigger credit limit.
  • Income: The cardholder’s income is another important factor that credit card issuers consider when setting the credit limit. A higher income indicates that the cardholder can pay back the borrowed money. Hence, they are more likely to get a higher credit limit.
  • Debt-to-Income Ratio: The debt-to-income ratio compares a person’s debt payments to their income. Credit card issuers use this ratio to determine the cardholder’s ability to repay the borrowed money. A lower ratio indicates that the cardholder has more disposable income and is more likely to get a higher credit limit.
  • Spending Behavior: Credit card issuers also consider the cardholder’s spending behaviour when setting the credit limit. If the cardholder has a history of responsible spending and timely payments, they are more likely to get a higher credit limit.

Why is the credit limit important?

The credit limit is an important aspect of a credit card because it determines how much money the cardholder can borrow. A high credit limit allows the cardholder to make larger purchases, which can be useful in emergencies or for major expenses.

However, it is important to note that a high credit limit also comes with a higher level of responsibility. The cardholder must be able to pay back the borrowed money on time and in full to avoid accumulating interest and damaging their credit score.

Additionally, a credit limit can affect a cardholder’s credit score. A high credit limit can improve the credit score by reducing the credit utilisation ratio and the percentage of available credit used. A lower credit utilisation ratio indicates that the cardholder is using credit responsibly and can improve their credit score.

On the other hand, a low credit limit can make it difficult for the cardholder to make necessary purchases and may lead to a higher credit utilisation ratio, which can negatively impact their credit score.

Also Read: Things to Know Before Swiping Credit Card For Cash

How can I increase my credit limit?

If your current credit limit is insufficient for your needs, you can request a higher one. Get in touch with your credit card customer service or go to the bank branch. These days, many card issuers give their customers the option of using internet banking to seek a higher credit card limit. Hence, by entering your credit card online banking account, you can also ask for a credit limit increase. If none of these strategies have succeeded, consider applying for a different credit card with a bigger credit limit.

Finally, here is how your credit limit is determined and the various elements that card issuers take into account. When looking for the best credit card in India, it is important to consider the credit limit and other features such as rewards, fees, and interest rates. To earn the trust of your card issuer and receive a greater limit, you must first ensure that all of your bills have been paid on time.