More than 60 million Indians depend on credit cards for shopping and paying bills, and that’s why many people want credit cards with high limits. So what qualifies you for a higher credit card limit? A good credit rating and many other factors that banks check before approving your application.
Here’s how banks set your credit limit and some simple tips for increasing the limit you have.
What is a credit card limit?
A credit card limit is a limit set by banks on a credit card issued to a customer. If your credit card limit is INR 100,000, you cannot spend more than the approved limit. The credit card limit is decided or set by the bank before approving a customer for a credit card. Certain other important factors also determine a client’s eligibility.
How banks determine your credit card limit
It is a known fact that the credit card limit is based on an individual’s creditworthiness. When you apply for a credit card, banks or other financial institutions determine your credit limit based on your credit score. They also check your income, employment status, spending habits, age, outstanding debts, payment and credit history.
Many financial institutions offer credit cards with predetermined limits. For example, when a bank issues a card with a limit of INR 2 lakh, that fixed limit applies to anyone who chooses that product. Other institutions don’t have this option and may do a thorough analysis of customers before approving them for a card with a higher limit.
But if you’re new to credit and don’t have a credit score, chances are you’ll get a lower credit limit. This is where banks trust a new customer and monitor their spending and payment habits. If all goes well and you are able to make your payments on time, your limit will gradually increase.
How to increase the credit limit on your credit card
There are many ways to improve your credit limit to the one that works best for you. It takes a bit of financial discipline, a bit of planning and patience.
Let’s take a look at your options.
- Pay your dues on time
The best way to improve your credit limit is to pay your credit card bills on time. Failure to pay hurts your credit score. Always try to pay your bills before the due date, this will also demonstrate your ability to repay the bank and gain their trust.
- Don’t go over your credit limit
Don’t spend it all. A credit card is a necessity that helps you in an emergency. It’s a good idea to spend up to 30% to 40% of your credit limit, because low credit utilization indicates that you’re not dependent on the credit card to manage your spending. Spending less will also allow you to easily pay your dues and increase your credit score.
- Erase your existing loans
Before asking your bank to increase the credit limit, pay off your current home or personal loan (any loan). Banks check your current debt before approving your application. More debt means less chance of getting a credit limit increase.
Income is the most important factor that determines your credit card limit. Submitting your updated proof of income helps you get your desired credit limit from banks. In most cases, banks make no effort to increase the credit limits of their current customers. Submitting your payslips and updating your information with the bank will increase your chances of getting higher limits.
Benefits of increasing your credit card limit
Maintaining a good credit rating increases your credit card limit and provides you with many other long-term benefits. An increase in your credit card limit means that your bank trusts you and considers you safe and reliable. This will help you get mortgages, personal loans, consumer loans, etc. at attractive interest rates.
It will also increase your overall credit score and allow you to negotiate better interest rates when applying for a loan. A higher limit will also help you in a medical emergency and your card will come in handy when you need it. You’ll also get other perks like airport lounge access, airfare discounts, e-commerce, and rewards points.
What is the difference between the total credit card limit and available credit?
A credit card limit and available credit are not the same.
Total credit limit – is the borrowing limit set by your bank or other financial institutions on your credit card. Going over the credit limit will often be penalized in the form of an overlimit fee.
Credit limit available – is the amount currently available on your credit card.
For example, if your credit card limit is INR 10,000 and you have spent INR 3,000, your available credit limit is INR 7,000. The total credit limit is INR 10,000.
Can banks or lenders change credit card limits?
Yes they can as they are the ones who will provide you with a credit card. For example, if you use a credit card, pay your dues on time, and keep credit utilization low, the lender or bank will increase your credit limit. After you’ve had a credit card for a while, you can always check yourself if you’re eligible for a credit limit increase by calling your bank representative. But if you miss the payment deadline and the amount continues to accumulate each month, the bank or lender will reduce the credit limit. This will have a negative impact on your credit score.
A credit card is like an emergency fund that should not be abused. Your credit card is best used for essentials, utilities, bills, and other needs. A credit limit increase has many benefits, but it also attracts the temptation to spend more. You should always keep your credit utilization rate as low as possible, never miss your payment due, maintain a good credit score, and don’t ask for too many credit cards.
If you’re someone who can resist the temptation to use the credit card, with willpower, then there’s usually nothing to worry about. It’s good to notice your own spending behavior, and to notice when you feel compelled to spend more, and to ask yourself a question right before you do, like a quick self-check before every purchase.
Questions like, is this something I need right now, do I really want it right now, is this the most important thing to me, am I spending or living at above my means, etc. These are great questions to ask yourself quickly while you’re at a store or shopping counter! You can also choose to never live off a credit card. Don’t go over your credit limit if you haven’t used the over limit transactions option. Always cut your coat according to the fabric you have available. Spend only when you need it. Not when you want.