One of the most critical aspects of your Credit Card is the credit limit that the banks sanction. The credit limit is the ceiling up to which the cardholder can spend on the Credit Card. Thus, the bank controls your purchasing power by stipulating a credit limit. The limit has other significant purposes such as it enables you to maintain a good credit score. The credit utilisation ratio(CUR) is the ratio of the Credit Card balance to the credit limit. It plays a critical role in arriving at your credit score. A lower ratio is desirable as it indicates the prudent use of the credit limits.
It now brings us to the question as to how do banks determine the Credit Card limit. The bank considers various factors before deciding on your credit limit. Let us look at some of them in brief:
Your credit history plays a vital role in the banks determining your credit limit. Banks check your credit history before approving your application. They treat every Credit Card application as a fresh one. Therefore, the credit report check is a mandatory one. It gives them an idea of your credit behaviour.
If you have a good credit score as a result of being a disciplined borrower in the past, the chances of getting a higher limit are bright. On the other hand, a bad credit score can result either in a rejection of the application or the stipulation of lower limits. In case you are a new borrower, you would not have a credit history. The banks do not have any means of accessing your credit behaviour. Hence, you can expect the banks to sanction a small limit to test your creditworthiness. It is an excellent opportunity to build up a good credit score following which you can Apply for the Best Credit Cards.
Your income plays a vital role in the approval of your credit limits. It is a straightforward calculation. The higher your income, the higher is the affordability. Hence, the banks look at income as one of the salient criteria for approving credit limits. However, a higher income level does not necessarily translate into a higher limit on the Credit Card. Your current debt is an essential factor because it determines your repaying capacity. Higher the amount of debt, lower will be the credit limit. The CUR comes into play here as well. If you have substantial unused credit available on your Credit Cards, the banks consider you to be a responsible borrower. Therefore, the chances of getting a higher limit are bright.
Your credit report is a mirror of your credit behaviour. It displays all the information that a bank looks for in the credit history of the applicant. If a specific bank has sanctioned a limit of 75,000, it becomes difficult for another bank to allow a substantially higher limit, say 2 Lakhs. Hence, your existing limits on your current cards play a vital role. However, if you belong to a bank’s elite group of customers, it becomes easy for you to get a higher limit on your new card.
Banks have various Credit Card products such as Gold Credit Card, Platinum Credit Card, Titanium Credit Card, and so on. Each type of card has an upper ceiling. Similarly, the elite or the premium list starts with a substantially high credit limit. Therefore, you should compare different types of Credit Card offers before you apply online. If you apply for a primarycard having a specific upper limit, you will not be able to get a higher limit in spite of having higher income and an excellent credit score. Similarly, the methods of determining your credit limit for co-branded Credit Cards and secured cards are different.
Your income, repaying capacity, and credit score are the three principal factors that banks consider before approving your credit limits. Many banks also look at specific non-income based factors such as your spending patterns and Credit Card usage. It helps the banks to decide whether you are a compulsive shopper or a frequent traveller or a regular diner at select restaurants, and so on. The banks consider these aspects to determine your credit limits. It is applicable for the co-branded Credit Cards.
Thus, you see various factors go into determining your credit card limit. There are other specific factors such as the bank’s internal credit policies, and so on.
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