With credit cards becoming popular, people often have a lot of queries about the various nitty-gritty involving a credit card, including its credit limit. So, what is a credit limit? To put it in simple words, your credit card limit is the maximum amount of money that you are eligible to spend using your credit card. It is always determined by the financial institution or the lender, based on various factors. Let us take a look at how your credit card limit is determined by your bank.
How do banks determine credit card limits?
- Credit score and credit history
The foremost thing that governs any bank’s decision on your credit limit is your credit history. Once you apply for a credit card, the issuer will inquire about your credit score with the credit bureau; this is known as a “hard pull”.
- This gives them access to your credit history, which consists of all your records of debt repayments. It also gives the prospective issuer an idea about your total debt, recurring debt, the number of credit cards you use, and most importantly, your payment patterns. If you have a habit of clearing all your dues on time, from EMIs to credit card bills, you are automatically in the good books of the credit card lenders.
Your credit score reflects how good of a borrower you are, and if you have a good credit score, it is quite likely that you will almost always get access to a bigger credit limit. By Indian standards, anything above 650 is considered a good credit score by most credit card issuers. However, to get the maximum credit card limit in India, you should aim for a score of 700 or above.
However, for people who have no credit history at all, secured credit cards are an effective way to get hold of a credit card. To get access to a secured credit card, one has to deposit a certain amount of money into their bank accounts. It is against this fixed deposit that users are handed a secured credit card. However, the credit limit for a secured line of credit is always lower than an unsecured line of credit.
- Debt-to-income (DTI) ratio
Apart from your credit history, one of the other things that the credit card issuers look at is your debt-to-income or DTI ratio. This is denoted by the percentage of your income that you spend paying off debts. If you have a high DTI ratio, it implies that a lot of your income goes into repaying debts and you might be financially overburdened. In such cases, lenders are unwilling to give you a higher credit limit anticipating that you would not be able to pay it back.
It is to be noted here that banks don’t directly look at your income for this, as it might be elusive to just look at a person’s income. The debt-to-income ratio, in fact, is a good measure for the banks to determine whether to give you a high credit limit. Usually, a debt-to-income ratio that is equal to or less than 30% does the job for most applicants.
- Number of existing credit cards and their limits
Credit card companies always take a look at the applicant’s existing credit cards. If you have quite a few credit cards against your name, it is solid proof that you’re a responsible customer. That way, the companies are more confident to give you a high credit limit. The credit limit on your existing cards also influences the decision of the banks.
Bajaj Finserv brings to you the Bajaj Finserv RBL Bank SuperCard, one of the best credit cards in India. The card lets you avail of personal loans for up to 90 days on your credit limit, in case you are in urgent need of money. It also has convenient EMI options that can be used to pay the loan back in 3 EMIs. All in all, with all the ultra-modern and handy features that this card comes with, it definitely deserves a place in your wallet.