In India, the know-how of your credit card limit is critical for maintaining a healthy credit score. Although individuals pay attention to the date of payments and outstanding debt, the credit limit takes centre stage when it comes to determining your financial wellbeing. This write-up is dedicated to how your credit card limit matters and why it determines your credit score and your overall credit profile.
The credit limit and credit score relationship
Your credit limit is simply the most amount you could borrow from your respective card company. It is set based on various factors, including your income, credit history, and loan repayment habits.
A high credit limit can benefit your credit report by keeping your credit utilisation ratio low i.e., the ratio of total available credit you’re using. It should normally be below 30% for the best possible credit score.
Credit utilisation ratio: A major driver
Utilisation ratio is one of the most critical factors in calculating your credit score. It is even more important if you are a new credit card user. For example, assume you have an overall limit of ₹1 lakh and have spent ₹40,000. Your ratio will then stand at 40%. This kind of aggressive usage will definitely damage your score.
Now assume your limit rises to ₹2 lakhs with the same expenditure level, your credit utilisation reduces to 20% and that can enhance your credit worthiness. That is why it is crucial to always keep your credit utilisation ratio to as low as possible, preferably lower than 30% of your total credit limit.
Effects of low credit limit
Simply put, a low credit limit is not healthy for your credit score and your overall credit report. Repeatedly hitting the card limit or almost reaching it will lead lenders to assume that you could be irresponsible with finances or highly dependent on credit and debt. That perception could lead to lower scores and poorer future credit worthiness.
Now, do remember, when you request a higher credit limit, your score will be negatively marked in the short term because of the possibility of a hard inquiry. But a higher credit limit will ultimately lead to boosting your score if managed correctly with consistent and timely repayments.
Methods of managing your credit limit
To reap the maximum benefit from a higher credit limit:
- Request for limit increases smartly: In case you possess a good payment record and regular income, only then consider asking your issuer to increase the limit.
- Low utilisation: Attempt to spend less than 30% of your accessible credit so that your utilisation ratio is controlled and remains in check all the time.
- Regular follow-ups: Check your credit report and expenses regularly so that it gets updated and points of improvement are identified. If there are discrepancies then promptly reach out to your credit bureau.
- Split big bills over multiple cards: When you have to pay a large bill, divide the bill over multiple credit cards. This does not load one card with excessive utilisation, keeping your overall credit score in good health.
- Install overuse reminders: All of the big credit card issuers allow you to install spending reminders on their site or app. The reminders remind you when you’ve reached a percentage of your credit limit, so that you don’t exceed the recommended 30% utilisation. By doing this precaution, you prevent accidental overspending and maintain your credit utilisation ratio within balance.
Therefore, by knowing the underlying impact of your credit card limit on your credit score, and following the above given guidelines, you will be able to make smart decisions that improve your financial standing.
Disclaimer: The information provided is for general informational purposes only and should not be considered financial advice; please consult a SEBI certified financial advisor for personalised guidance.
