If you wish to apply for a credit card, then you must know the important details about it and the credit limit is one of them.
What does Credit Card Limit Mean?
It is the maximum balance that you are allowed to maintain on your card at a particular time.
Your card limit size has an impact on the purchasing power that you possess with this plastic card. So, the higher the limit, the more you can buy. As soon as you reach the card limit, your card provider will not let you make additional purchases until you clear at least some of the outstanding balance.
You already know what a credit limit is. But, while applying for a card, has this thought ever crossed your mind- How does your card company decide this limit?
How is a Credit Card Limit Determined?
When you get an approval for the best credit card, there are many factors that affect the amount that the card issuer will let you spend on that account. Every issuer has a criterion of its own; however, most of them take similar information into consideration. Here are some of them.
01. Your Income
Generally, the amounts of dirhams you earn affect the amount of money you can manage to pay. If you have a higher income, then there are higher chances of getting approval for a higher credit limit. However, there is no guarantee of the same. There are many other factors that your issuer takes into consideration.
02. Credit Card Type
Imagine that a card is a product that comes with pre-determined characteristics such as fees, credit limits, rates of interest, and more. How a limit is set on a card is dependent on its type. There are some cards that have a fixed limit that all the approved card members will receive, irrespective of the other factors.
Other cards may have a range of limits and the approved card members will be assigned a limit that lies within that range. The applications, which are most well-qualified, will receive a card limit on the higher side of the range.
03. Credit History
If you have held credit cards in the past, then the way you have handled the credit limit on those cards will not just affect your approval for the new card, but also the limit that you will receive upon approval. High balances, late payments, over-limit charges, and all the other negative information in your credit history will make it reduce your chances for a higher credit card limit.
04. The Ratio between Debt and Income
The card issuer will calculate your debt-to-income ratio by using details from your application and your credit report. This ratio has an impact on the card limit you will receive. This means that a higher offset of income by higher repayments of debt can lead to a lower credit limit as opposed to what you could have received if you would have been spending lesser amounts on debt repayments monthly.
How does your Credit Card Limit Affect your Credit Score?
The card limit has an indirect effect on the credit score. Higher limits can cause a lower credit utilization ratio. As a result, your credit scores will be benefited.
Since a higher limit can cause a lower credit utilization rate, asking for an increase in the credit limit may prove to be an effective strategy for credit improvement sometimes.
In a Nutshell!
The credit limit on your card will define the maximum amount you will be able to spend with your credit cards. It is a method by the issuers to control the risk involved in lending money. If you have a high card limit, it can benefit you by giving you the flexibility for spending money whenever you wish to, while also maintaining your credit score.
However, these high limits may turn out to be dangerous in some cases. This is because over-spending on a credit card with a high limit can add up to your debts making them difficult to pay off.
You must have credit card limits that are high enough so that you end up spending only up to 30% of it. However, it should not be so high that you become incapable of handling the debt if you find yourself reaching the limit.
Your credit limits should be at a range that allows you to meet your financial goals and at the same time does not take you towards a pile of debts that you cannot manage. It must be something you stay way below, instead of making it a target to achieve.