What is the Credit Limit of Credit Card?

What is a credit limit of a Credit Card?

The term credit limit is the maximum credit amount that a financial institution grants to a customer.

A credit institution extends a credit limit on a credit card or line of credit. Lenders generally set credit limits based on the information in the request of the person applying for credit.

A credit limit is one of the factors that affect consumers’ credit ratings and may affect their ability to obtain credit in the future.

credit limit
credit limit

Understand credit limits

 

Credit limits are the maximum amount that a lender allows the consumer to use with a credit card or revolving line of credit.

The limits are determined by banks, alternative lenders and credit card companies based on several information related to the borrower.

They look at the borrower’s credit rating, personal income, repayment history of loans, and other factors.

Limits can be set for unsecured credits and secured credits. Unsecured credits with limits are generally credit cards and unsecured lines of credit. If the line of credit is secured (collateralized by a guarantee), the lender takes into account the value of the collateral. For example, if a person enters into a line of credit on net worth, the credit limit will vary depending on the borrower’s home equity.

Lenders do not want to impose a high credit limit on someone who can not repay it. If a consumer has a high credit limit, this means that a creditor considers the borrower to be a low risk borrower. This borrower also has more flexibility to spend when and how he wants with a higher limit.

[Important: high credit limits can be embarrassing, as excessive spending can make payment difficult.]

How do credit limits work?

A credit limit works the same way, whether the borrower has a credit card or a line of credit. A borrower can spend up to the credit limit, but if he exceeds that amount, he generally incurs fines or penalties in addition to his regular payment. If the borrower spends less than the limit, he can continue to use the card or line of credit until he reaches the limit.

Keys to take away

The term credit limit is the maximum credit amount that a financial institution grants to a customer.
Lenders generally set credit limits based on the consumer’s credit report.
A lender generally gives lower risk credit risk to high risk borrowers because they may not be able to repay their debt. Low-risk debtors generally have higher credit limits, which gives them greater flexibility in spending.

Credit limit versus available credit

A credit limit and an available credit are not the same thing. If a borrower has a credit card with a credit limit of Rs 1,000 and spends Rs 600, he has Rs 400 left to spend. If the borrower makes a payment of Rs 40 and incurs a Rs 6 finance fee, the balance drops to Rs 566 and they now have Rs 434 in available credit.

Can lenders change credit limits?

In most cases, lenders reserve the right to change credit limits. If a borrower pays their bills on time every month and does not maximize the credit card or line of credit, the lender can increase the line of credit, which has a number of benefits. These include increasing the overall credit rating and gaining access to larger, cheaper credit.

On the other hand, if the borrower does not make repayments or there are other signs of risk, the lender may choose to reduce the credit limit. A reduction in the borrower’s credit limit increases the limit-to-balance ratio. If the borrower uses a lot of his credit, it becomes a higher risk for current and future lenders.

 

Credit limits and credit ratings

A person’s credit report shows their credit vehicles, as well as the credit limit of the account, the top balance and the current balance. High credit limits and multiple lines of credit can affect a person’s overall credit rating. New potential lenders can see that the applicant has access to a large amount of open credits. This sends a red flag to the lender simply because the borrower can choose to maximize his credit lines and credit cards, overburden his debts and become unable to repay them.

Because high credit limits have a potential effect on credit ratings, some borrowers sometimes ask creditors to reduce their credit limits.

 

How much of your credit limit can you use?

You can make purchases up to your credit limit, but you may not be able to exceed your credit limit, especially if you have not yet chosen to process transactions that exceed the limit. Exceeding your credit limit may result in over-limit fees and trigger the penalty rate. Refer to your credit card agreement to find out if its card issuer is penalizing you for exceeding your credit limit.

 

Exceeding your credit limit, and even approaching it, affects your credit score. Your credit limit – and your credit card balance – is reported to the credit reporting agencies every month along with other information in your account. This information is used to calculate your credit score and your factors in the “credit use” part of your credit score.

Credit usage measures the amount of your credit limit used and accounts for 30% of your credit score.  It is best to keep the balance of your credit cards between 10% and 30% of your credit limit to get the best credit score.

Your credit limit is reusable. You can use your credit several times as long as you pay on time each month and your account is in good standing.

 

Credit limit against no predefined spending limit

Some credit cards do not have a firm credit limit. These credits have no pre-established spending limit. Credit cards with no pre-set spending limits do not give you an infinite amount of credit available. Instead, these cards have an expense limit that varies based on your spending habits, your income, your credit history and other factors.