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

If you are a credit card user, you would have surely heard of the term ‘Credit Limit.’ For those who don’t know, a Credit Limit is the maximum amount that credit cardholders can spend using their card in a month or it can be defined as the maximum amount that a card issuer allows its customers to spend within a billing cycle. However, the credit limit can be different for different cardholders and it can also vary depending on different card issuers. This is because every card issuer’s criteria to set credit limits for their customers might vary.

Many of you might wonder about how the credit limit on your credit card has been determined and why you have got a lower limit on one credit card and higher on the other. In this article, we will make you understand what are the different factors that are considered while your credit limit is set and how is your credit limit important. Keep reading for detailed information on the same:

How Is Your Credit Limit Determined?

The card issuers or banks consider a lot of factors while determining the credit limit for a cardholder as they can’t just provide everyone with an equal credit limit irrespective of their risk profiles or income. So, it becomes important for card issuers to analyze a few things while setting the credit limits for their cardholders. Following are some of the major factors that are considered while determining your credit limit:

1. Credit Score

Your Credit History or Credit Score is something that matters the most in your whole credit journey. From the approval/rejection of your credit card application to the determination of your credit card, your credit score plays a major role as it helps the card issuers understand how risky/responsible you are as a borrower. The better your credit score is, the higher will be your credit limit and vice versa. And this is the reason why people having a low credit score don’t get approved for a credit card easily and even if their application is approved, they get a credit card with a very low credit limit in the beginning.

Also Learn: Ways To Build Credit Score Fast

2. Income

Income is also a necessary factor that is considered while your card issuer sets your credit limit. The card issuers provide their customers with a credit limit on the basis of their income in order to make sure that they can afford to pay that amount later. So, individuals having a high and stable annual income generally get a higher credit limit as compared to the ones having a low or unstable income. This is why it is advisable for you to mention all your sources of income while applying for a credit card so that the card issuer can offer you a higher credit limit based on your net annual income.

3. Past Payment History

Even if you have a decent credit score, and have delayed your payments several times, the card issuer might consider you a risky borrower and provide you with a lower credit limit in the beginning. On the other hand, if you are someone with a high credit score and no payment defaults, it will be easier for the card issuer to trust you and offer you a good credit limit on the basis of other factors only. So, you need to make sure that you don’t miss/delay payments that are reflected in your credit report as such type of payment history can affect your credit score as well as the credit limit in a long term.

4. Relationship With The Bank/Card Issuer

Your relationship with the bank or the card issuer from which you have applied for a credit card also matters when it comes to setting your credit limit. If you are already having a credit card from that card issuer or you have a savings account/loan account/any other type of account with that bank, they will trust you more than someone who is a very new customer to the bank. Therefore, it is advisable to build a strong relationship with the bank or card issuer from which you want to have a credit card.

Why Your Credit Limit is So Important?

As discussed earlier, your Credit Limit is the maximum amount up to which you can spend every month on your credit card. It is an important term that every cardholder should be aware of because it plays an important role in your credit card journey as well as in building your credit score. You should be aware of the fact that in order to maintain a good credit score, it is advisable to utilize not more than 30% of your total credit limit. The credit Utilization Ratio is the second most important factor that is considered by the credit bureaus while calculating your credit score. So, you should make sure that you are not utilizing more than 30% of your total credit limit in a month. If you have a really low credit limit on a credit card, you should consider getting another card or getting your credit limit increased on the same card. By doing this, your total credit limit will increase and you might find it easier to manage without spending more than 30% of your total available credit.

How To Get a Higher Credit Limit?

If you feel that your credit limit is not sufficient enough for you, you can apply for a higher credit limit. You can do this by contacting your Credit Card customer care or by visiting your nearest branch of the bank from which you have got a credit card. Nowadays, many card issuers also provide their customers with an option to request a higher credit card through internet banking. So, you can also request a credit limit increase by logging in to your credit card internet banking account. If you have tried all of these methods, and nothing worked out, you should consider applying for another credit card that might come with a higher credit limit.

Bottom Line

Now, you might have understood how your credit limit is set and what are the different factors that are considered by the card issuers. However, you can always request a higher credit limit if your current credit limit is not sufficient for you. But, before that, you should make sure that you have paid all your bills on time so that your card issuer can trust you and provide you with a higher limit. Also, maintaining a good credit score is always an important thing to be kept in mind if you are a credit cardholder. So, just keep making your credit card bill payments on time and don’t exhaust so much of your credit limit as these things will help you get a better card with a higher limit easily. If you have any additional doubts regarding the topic, you can freely ask us in the comment section below!