Moneycontrol
Last Updated : Oct 17, 2018 05:15 PM IST | Source: Moneycontrol.com

Credit cards: What is credit limit and how is it important for financial discipline?

The purpose of setting a credit limit is to help maintain a good credit score.

Navneet Dubey @imNavneetDubey

Do you know how much money you can avail as credit from your credit card? Credit limit is the maximum balance the issuer of the card allows you to avail within a billing cycle. Have you ever thought why and how that limit is set for you? The bank sets a credit limit just to control the amount of purchases you can make using the credit card. The purpose of setting a credit limit is to help maintain a good credit score. Credit limit offered is varies for different customers.

Along with the credit limit, a cardholder should also understand the term ‘credit utilisation ratio’ which is the ratio of your credit availed to the credit limit you are allowed. If you have a high credit utilisation ratio, your credit score gets reduced.

The limit offered to customers is based on various parameters. For example, banks check credit history, your income, loans, and also the limits on other credit cards which have been issued by other banks, to decide your credit limit.  However, there are also other types of credit cards which don’t consider these factors when deciding the credit limit.

Three ways how you can maintain good credit score by opting a standard credit limit:

=| Choose a credit limit which should ideally be equal to your monthly income.

=| Try to stick to 20-30% credit utilisation. For example, if the credit limit is Rs 1 Lakh, you should ideally use around Rs 25000-30000 with the credit card during a billing cycle.

=| If the credit utilisation is high, you must have multiple credit cards. This can spread spending across cards. This is a good idea as long as you don’t default on repayments.

When should you increase the limit?

Keeping a credit card at a very young age has become very common these days. This actually helps millennials to buy expensive products of their desired need through EMI option which can be readily availed through credit cards. Since, at the initial stage, you get a very low credit limit as per your salary structure, it is advisable to increase your credit limit every third or fourth year as your income increases. Also, before getting your credit limit increased, you should assess your liabilities and then take a step forward towards increasing your limit.

How to increase credit limit?

== You can apply for a credit limit increase on credit card. Banks check credit card usage and if they find you pay outstanding dues on time, spend small amounts with the card and have a high credit score, you might get an offer from the bank to raise the credit limit.

== You can call the customer care of the bank and ask for a raise in credit limit. This would be a good idea if you have gotten a raise in salary or a job change/promotion. You must submit income documentation.

== If you have cleared off loans, contact the bank with proof (documents as evidence) and ask for an increase in credit limit. The bank decides whether to raise the credit limit or not.

== Maintain good spending and payment history. With frequent credit card purchases and paying dues in time, you become a responsible credit card user and banks offer to increase the credit limit.
First Published on Oct 17, 2018 10:43 am
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