All You Need To Know About Credit Card Limit
One of the most important things to know about your credit card is its total credit limit – the maximum amount you can spend using your credit card in one billing period. To determine your credit limit, the credit card issuer takes multiple factors into account such as your annual income, age, current debt, employment status, and existing credit (if any) in your name. Together with these factors the issuer also uses your credit score and your credit history to ascertain the credit limit that they can offer.
How much credit limit can I get?
For first-time credit card users, there won’t be any previous credit in your name and the bank will not be able to determine your risk profile due to lack of credit history. Thus, first-timers typically have a low credit limit. You won’t get to know your credit limit until your credit card application has been completed and approved by the issuing company. Normally, your credit limit lies between double to triple of your monthly gross salary.
You can easily spend all the way up to your credit limit but you may not be able to go beyond that, specifically if you have not opted for an ‘over-limit’ transaction processing option with your issuer. In cases where such transactions are allowed, they may trigger an ‘over-the-limit’ penalty fee (typically around 3%) being charged on your surplus spending. The details about how your specific issuer penalizes you for exceeding your limit are mentioned in your credit card agreement.
A far reaching consequence of over-utilizing your credit limit is the negative impact it has on your credit score. Your credit limit and your credit balance is reported to the credit bureau each month. It uses this information to calculate your credit utilization ratio (ratio of credit used to the total credit limit) and your credit score. The lower your credit utilization ratio the better for your credit score. A poor credit score reduces your chances of getting a higher credit limit or availing a loan in times of need.
Can banks decrease my Credit limit?
Just as credit card issuers reward you for excellent payment history and loyalty with a credit increase, they can also cut your credit line if they suddenly view you in the ‘high-risk of defaulting’ category. This mostly happens when you use your credit card irresponsibly – delayed payment, missed payment, not managing your other accounts well, overspending or under-spending. Such habits negatively impact your credit score and in turn your credit limit.
Sometimes, credit limit reduction is also caused if somebody steals your identity and spends like a ‘risky-borrower’ under your name. Also, there could be some error or unknown debt in your credit report that has lowered your credit score. Whatever may be the reason, if your bank lowers your credit limit, you should immediately call and ask them for an explanation to better understand the underlying cause.
How much Credit Limit should be Utilized?
To avoid facing such a situation, experts recommend keeping your credit utilization below 30% and above 10%, which is suggestive of responsible credit usage. If you do not use a significant portion of your credit frequently, the card issuer cuts your credit line to ‘better fit’ your usage patterns. Although lowering the credit limit is not in your control, you can prevent it by staying vigilant about your credit profile. You should keep a check on your credit reports, make timely payments for all your cards, maintain low debts and responsibly use your credit card for small purchases regularly to avoid falling into the trap of lowered credit limit.
Is it good to increase your credit limit?
A low credit limit is the most common concern among credit card users. Technically, a credit card issuer automatically increases your credit limit periodically based on your financial profile and your issuer’s policies. If that is not the case, you can also apply for a higher credit limit as often as you like, either online or by calling your card issuer directly. One typically asks for credit line increases when they have a higher purchasing power or you wish to boost your credit utilization ratio. There are many advantages of a higher credit limit, to list a few:
Reduction in Credit Utilization
If and when your credit limit increases it helps to increase your credit utilization ratio if you use it responsibly and forgo increasing your spending. A good utilization ratio boosts your credit score.
A higher credit limit provides a financial cushion in times of need. It can help you in situations where your emergency funds are not enough. Example – Your international credit card can come to rescue when you are in a financial jam in another country where your currency is not valid.
Rewards and Benefits
A higher credit limit translates to higher spending and in turn higher reward points. You can accumulate a lot of points by making purchases and use them for attractive offers with partner vendors.
Although a higher limit sounds lucrative, there are a few disadvantages of asking for the same, major ones are:
- Higher Debts – A higher credit limit gives a person more spending power and at times, they end up buying more than
- Stricter Enquiries – By requesting an increase in your credit limit, you attract more attention from the credit card issuer in terms of stricter enquiries and evaluation of existing credit. If such enquires are made in a short period of time, they may reduce your credit score.
Given the pros and cons of asking for an increase in your credit limit, you should carefully evaluate your budget and spending pattern before requesting for an increase in credit limit.
Ever wondered how credit card companies make money? Find out here.
Is it good to ask for a credit limit increase?
It is rational to ask for a higher only if you are currently able to pay your full balance each month without any problem. You should be prepared to justify your expenditure when you call your issuer to ask for a higher credit limit. It could be a good time to ask for a limit increase in the following cases:
- You annual income has increased substantially and you have valid proofs for the same.
- Your credit score has improved recently.
- You are a loyal customer with the credit card issuer for at least 6 months and have used your credit responsibly.
- You have neither been automatically upgraded nor asked for new credit lines in the past 12 months.
Thus, your timing is critical to determine if requesting a higher credit limit is the right move.
When to deny higher Credit limit?
You may want to delay asking for a higher limit if:
- Your income has decreased recently.
- You have had recent enquiries for loans/ new credit lines.
- You have missed/delayed your payment to one or more credit card accounts.
- You’re too close to your credit limit on the card you are planning to request an increase.
With such an assessment of your profile, the best time to ask for a credit limit increase varies for person to person. If you decide to move forward and ask for a limit hike, don’t be too optimistic. As a matter of fact, you should ask for, and anticipate only a 10% to 25% (max) increase in your credit limit. If approved, your credit limit increase reflects almost instantly in your account.
How you can increase your credit limit?
With all this information at your disposal, you must now be eager to know the ways to increase your credit limit. The most common ways to do so are listed below:
1. Wait for automatic update
Most banks offer an increase in the credit limit annually or semi-annually based on your performance over a period of time (typically 12 months). If you are in no hurry to increase your credit card limit, you may very well sit back and use your credit responsibly to get a credit expansion. However, before accepting a credit limit increment you should consider a few important factors:
Your current limit is sufficient or already higher than what you feel comfortable with then you can decline the credit extension.
Will my credit limit increase automatically?
In some cases, if your issuer has a credit limit assigned to each subscriber then you may want to avoid maxing out your limit with that issuer. If you hit the assigned limit, you may not be able to get any other cards from that issuer. You can learn more about your combined limit by directly asking the issuer about the same
An increase in credit limit attracts hard enquiry on your credit report. This affects your credit score for a year and stays on your credit report for two years. Thus if you are concerned about your current credit score and do not want to lose any points, it may be wise to pass the offer for a higher limit.
2. Improve your credit score
This is the most critical factor to determine your creditworthiness. Every lender checks your credit score before offering any kind of credit extension. Pay all dues, EMIs, bills, and other settlements on time for all your accounts to ensure a high credit score.
While making partial payments and having pending balances may impact your credit score, overpaying your credit card company does not improve your score in any way. In fact, a negative balance on your card (i.e. overpaid balance) has the same effect on your credit score as a zero balance (i.e. paying the full amount). Having a negative balance, however, is much better than having a huge balance but there are no special benefits to it.
3. Apply for a new card
The most straightforward way to increase your credit limit is to apply for a new credit card with a higher limit. There is an array of vendors and cards offering numerous benefits across various categories to suit your needs. If you are applying for a new card or are already maintaining one well, the lender will gauge your ability to manage credit through your credit score (and/or other factors mentioned above) and accordingly offer the best possible limit.
4. Request for a higher credit limit on your existing card
Most issuers offer an option for their customers to place a request for increasing their credit limit. The decision, however, will depend on your credit score, income, bank policies, and usage history, spending patterns, dues, debts and information about other accounts
5. Update the bank about your improved financial status
Usually, when you get a hike or create additional sources of income, your eligibility for a higher credit limit automatically improves. Once you provide consolidated proofs of your improved financial status to the bank, the bank may decide to increase your credit limit on the existing card or provide you with a better credit card altogether. This decision is, naturally, based on the bank’s discretion.
Why was my Credit limit increase denied?
Applying for a higher credit limit does not guarantee one. Such requests are often denied by credit card issuers based on their analysis of your credit report and financial profile. The most common reasons due to which your request may be denied are:
- You defaulted or delayed your payments on one or more credit card(s)
- Whether you have a high (available) balance on your credit card (underutilization of credit)
- You opened several accounts within the past two years. The threshold varies from bank to bank.
- You already have too many credit cards (or a lot of available credit) making you a high-risk borrower.
- If you have placed too many requests for credit within the last 1-2 years it may appear that you are trying to fix some financial trouble with credit, thereby reducing your chances of getting a better limit.
- Your account is too new (<6 months old) to be considered for a limit extension.
- Your credit limit was recently increased. You should wait at least 6 months to request for another increment.
- Your credit score is too low or there are recent negligence events on your credit report.
Does an increase in my Credit Limit affect my CIBIL score?
Your credit card limit highly depends on your credit score a.k.a. CIBIL score. The opposite is also true – your credit limit can affect your CIBIL score as well. Having a higher credit limit exposes you to more debt, especially when the idea of enhancing your credit limit has been triggered by a cash crunch situation. In such a case, increasing your credit limit is viewed as a sign for depending on credit to manage expenses thus raising a red flag in your credit score assessment.
However, if expanding your credit limit is a well-planned and well-though move, it may help you in maintain your utilization ratio within advisable limits, thereby keeping your CIBIL score (more or less) unaffected
How do you get a 850 credit score?
CIBIL score lies in the range of 300 to 900 and is maintained by the Credit Bureau (licensed by the RBI) in India. The perfect CIBIL score that one can achieve is 900. It’s good to maintain a score of 700 or more for most borrowing purposes. A score of greater than 800 is an impressive benchmark that a very few people are able achieve. In fact, less than 1% consumers shall ever see an 850, if they ever do. Click to know more about CIBIL SCORE.
There is no quick fix to achieve the highest credit score. To do so, one must work towards improving one’s credit health and that takes time. There are a few major factors that go into the estimation of your credit score as listed below:
|Utilization Ratio||<9%||10%-29%||30%-49%||50%-74%||75% and above|
|Payment History(= number of on-time payments/ total number of payments)||100%||99%||98%||97%||less than 97%|
|Derogatory Remarks||0||0||1||<4||4 and above|
|Credit Card Age||more than 9 years||7 to 8 years||5 to 6 years||2 to 4 years||less than 2 years|
|Number of Credit Accounts||above 20||11 to 20||6 to 10||0 to 5|
|Number of Credit Enquiries||0||1 or 2||3 or 4||5 to 8||9 and above|
Thus you may see that there are some factors that you can control while others are more time-dependent in nature. However, you can work towards improving your score by keeping a track on your spending and payment habits, maintaining clean financial records, striking a balance between secured and unsecured credit, and avoiding over-leveraging. You should periodically review your credit report and ensure it is free from errors to ensure you are on-track to achieve your desired score.
Thus, if you are a seasoned credit player and have a high credit score you may be offered high credit limits (as much as $10,000) by various issuers. If you are eligible for such high limits, some credit cards that you can check are First Tech Platinum Secured MasterCard, Petal Visa Credit Card, Chase Sapphire Reserve, Fidelity Rewards Visa Signature, and First Tech Odyssey Rewards World Elite MasterCard.