Ever wondered why your Credit Card limit is lower than your friend’s? Here are four factors banks consider to determine it.
Do you ever wonder what factors banks consider to determine your Credit Card limit? Sure, you’ve probably given it some thought and even conjured up many theories. But the only way to know the answer is by applying for a Credit Card.
The general consensus is that the upper limit of your Credit Card is twice or three times the sum of all your incomes. Simple to calculate, but in reality, it is much lower. This is because banks factor your debt obligations and other expenses too.
The trick is in setting the right limit. On one hand, low-limit Credit Cards might not appeal to customers, and on the other hand, banks risk payment defaults by setting a very high limit. The top limit on a Credit Card, therefore, must be generous enough yet one that can be easily repaid by the cardholder.
Though each bank follows its own calculation method, there are broadly four factors banks consider to determine your Credit Card limit. Let’s look at them.
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Giving a Credit Card is one way of extending a loan. As with all loans, banks will study your credibility before giving it away. How do they do it? They do so by studying your Credit Report and Credit Score.
A Credit Report contains information about your personal details, credit history, bill-payment details, account transactions and much more. Your Credit Score is an important piece of information on the Credit Report, but it is not the only thing that one needs to check in a report. Lenders check your credit history before sanctioning loans and Credit Cards i.e. the loan that you borrowed and how you repaid the dues.
Higher your Credit Score, better your chances of getting a Credit Card, and a feature loaded one at that. Likewise, an average or poor Credit Score could result in banks setting a low limit on your Credit Card.
If you are new to Credit Cards, banks might first set a low limit on your card and then later raise it depending on whether you pay your bill on time or not. So don’t get upset if you don’t receive a 6 digit limit on your card. Keep your credit utilisation ratio under 30 percent and always repay your bills on time. Things will change for the better soon.
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Your preferred Credit Card issuer has to ensure that you have the financial bearings to clear your bills. How do the banks do this? They study the difference between your monthly salary and base credit limit and also calculate how much of your income is left after your expenditure. Your bank statements are a good indicator of the expenses you incur. If your expense management looks good and banks see that you manage to save a sizeable portion of your salary every month, then they will willingly issue a Credit Card to you, especially one with a pleasing upper limit.
Your salary is one of the most important factors banks considered when reviewing your Credit Card application and to determine the upper limit on it. So if you have many sources of income, it’ll work in your favour if you reveal all of them.
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Risk borne by the issuer
The credit limit extended to an applicant also depends upon the issuer’s policy towards risk management. Some banks have a low forbearance towards risk and refrain from giving high credit to people with a bad credit record. On the other hand, some banks can be generous enough but may charge a high annual fee.
The economic situation of a country also determines the credit limit extended to people. If there is a slump, then prepare for banks to lower the credit limit on your Credit Card. Likewise, a booming economy can work favourably for those looking to raise their credit limit.
Initially, Credit Cards were a luxury. Only a few could get them. Thanks to favourable policies and the government’s cashless economy dream, getting a Credit Card is no big deal today. Banks are ready to extend a Credit Card even to those with low salaries or Credit Scores. But you could be paying the price in the form of high-interest rates and other charges.
You can join the league of Credit Card holders even if your Credit Score is low or if your salary doesn’t make the cut. How? With a secured Credit Card. It’s given against the security of a Fixed Deposit and the upper limit on it is capped at about 70 to 80 percent of your deposit amount.
With time, you can request the bank to change your Secured Credit Card into a regular card. But first, you need to prove to the bank that you are a responsible Credit Card user.
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Wise credit usage
When your bank raises the credit limit on your card, don’t go crazy swiping. It is not a healthy mindset to have and could lead you to incur big debts. Use your Credit Card wisely to build your Credit Score and to also earn reward points and cashback on your purchases.
In some cases, you might want to raise your Credit limit to improve your credit utilisation ratio. But before you submit your request, build some good credit habits. Pay your bills on time and keep your credit utilisation low. After this, you can contact your issuer and relay the request to them. They will analyse your Credit Score and then decide the course of action. Do not request your bank for a credit limit hike as soon as you get your Credit Card. Wait for at least six months. Let your banks observe your credit behaviour. They might fulfil your request even before you ask.
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We hope you have a fair understanding of what it takes to get a Credit Card with a good upper limit. Though we can’t exactly tell you how much credit you are eligible for with your Credit Card, we, for sure, can help you find the right card.