For every transaction we do, or for any purchase that we make, we often use a credit card as it offers many benefits and rewards on such transactions. We also know that with every credit card comes a fixed credit limit. This limit tells us the maximum amount that we can spend using that particular card. However, apart from the credit limit, there are also other limits that every credit card carries like the cash limit, daily limit, etc. People often get confused between these terms and end up facing extra charges due to the lack of knowledge and clarity. Therefore, today we are going to discuss in detail the difference between the credit limit and cash limit and everything you need to know about these two terms.

difference between credit limit and cash limit

Credit Limit

A credit limit is a maximum amount provided by the credit card issuer which is available for the cardholder for spending in a particular billing cycle. The limit is pre-defined at the time of card activation and is set based on the portfolio of the cardholder. In simpler words, the credit limit is the maximum amount that you can use with your credit card and you would not need to pay any additional charges on the same. Every time you use your credit card to pay for a bill or any transaction the same amount will be subtracted from your credit limit and the balance left will be your available balance or available credit limit. The limit becomes normal after every billing month. If you use your credit card above the credit limit, the card won’t allow the transaction. Even if it did, the bank will impose heavy penalties and interest charges on the same.

How Credit Limit is decided?

The credit limit for every cardholder is decided and set by the card issuer, i.e. the bank. The Bank undertakes a full investigation of your profile to decide the right credit limit for you. The bank observes your ability to pay back the debt and your spending habits. Therefore, several factors are considered by the Bank when deciding on a credit limit on your credit card, following is the list of such factors:

  • Credit Score: The Bank checks your credit score which signifies your ability to manage your credit and your creditworthiness.
  • Credit Report: The Bank checks whether or not you have defaulted on any bill payment or loan repayment in the past and the reasons.
  • Monthly Income: This is an important factor as the bank will provide you with a better credit limit on your credit card if you have a good and steady income.
  • Debt: The bank also enquires about the current debt that you are holding and your ability to pay it back.

Can I Spend Above my Credit Limit?

When you use your credit card even after exhausting your credit limit, this shows that you have crossed the credit limit on your card. In most cases, the card will decline your transaction and you would not be charged for declined payment as you have reached the limit on your credit card. However, some cards may allow the payment, and you have to face the charges on the same. These charges are over-limit charges, and finance charges and may reduce your credit limit. If you keep using your card over and above the credit limit, in the worst case, the bank can also close your account and your credit score would go down.

With every credit card, you will get the over-limit protection feature. If enabled, the card will automatically decline your transactions if you have exhausted your limit. This way you will be safe from heavy charges.

How to Increase your Credit Limit?

If you think that the credit limit assigned on your credit card is short and easily spendable, then you can approach the bank and ask for an increase in the credit limit. The Bank would not simply increase your credit limit like that, rather it would check multiple factors and then may decide to increase the limit. Following are such factors that you must keep in mind if you want your credit limit to be increased:

  • Use your credit card wisely: If your monthly spending is constantly touching your credit limit, then the best possible way is to settle the bill in full every month. This will show the Bank your ability to settle the payment quickly and your credit limit might be increased.
  • Request directly: You may approach the bank directly and ask for an increase in the credit limit for genuine reasons.
  • Show increased salary: If your salary has been increased and you are holding an old credit card, you may approach the bank with your latest salary slip and ask for an increase in the credit limit.
  • Get a new card: You can also apply for a new credit card with a new and fresh credit limit.

Cash Limit

A cash Limit on a credit card is the maximum amount of cash you can withdraw using your credit card. Cash advance or cash withdrawal occurs when you withdraw cash from ATM using your credit card, deposit money directly to your bank account, using a cheque for transactions with your credit card. All these transactions are regarded as cash advance. The cash limit for your credit card is calculated as a portion of your credit limit. Generally, the cash limit for all credit cards is between 30% to 40% of the credit limit. If you use your card over the cash limit, the bank would impose charges on the amount like cash advance fee and interest charges. Moreover, the interest-free period is not applicable on the cash advances, so the day you do cash advance, the bank will start imposing the charges.

How is Cash Limit decided?

As mentioned above, the bank has the sole right to decide your cash limit on the credit card. The factors that are taken into account when deciding the cash limit for a person are more or less similar to the credit limit as mentioned earlier. These are credit score, credit history, monthly income, and debt holding.

What charges are applicable on Cash Advances?

The cash limit is very different from the credit limit, as credit limit charges are applicable only if you spend over and above the credit limit. But in the case of cash limits, the bank will start imposing charges like cash advance fees and interest charges, the moment you do a transaction regardless, of whether you have crossed the limit or not. Even if you cross the limit, the bank will impose more and more charges and may increase the interest charges.

Also, there is no direct way to increase your cash limit, it can be automatically increased if your credit limit has increased else you can apply for a new card.

Quick Comparison

Basis Credit Limit Cash Limit
Meaning A Credit Limit is the maximum amount that can be spent using a credit card. A Cash Limit is a maximum amount that can be withdrawn using a credit card.
Calculated A credit limit on a credit card is calculated by the bank considering many factors like income, credit score, credit report, etc. A Cash limit is calculated as a percentage of the credit limit. It is generally around 30-40% of the credit limit.
Charges Applicable If you use your credit card over and above the credit limit, the bank will impose heavy charges like over-limit charges and finance charges. If you do any transaction related to the cash advance, the bank will impose charges like, a cash advance fee and heavy finance charges.

Conclusion

Now you must have got an idea about the difference between the Credit Limit and the Cash Limit. Also, you must have understood the other things related to both of them. Cash Limit is just a part of the credit limit, whereas the whole credit card works on the credit limit. Therefore, it is advisable to use the credit card below the credit limit and always try to get your limit increased if there is a requirement. Moreover, cash advance charges are applicable whenever you withdraw cash, your cash limit doesn’t matter. Therefore, try not to use your card for cash advances as you will face lots of charges. Hope both the concepts are clear to you, if you still have any doubt let us know in the comment section below.

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