What exactly is a credit limit?
Credit cards come with a credit limit, which varies by card type and is determined by a variety of variables. Apart from a variety of other considerations, the applicant's income is one of the most important elements that determine the credit limit when applying for a card. The credit limit is the maximum amount that a cardholder can spend on the card they have been issued.
For example, if a card's limit is Rs. 100,000, the user can spend up to that amount in a billing cycle. The limit is reset to Rs. 100,000 for the next payment cycle if the dues are paid. The CIBIL report contains information on all of your active credit cards, including their limitations.
Impact of Credit Limit on Credit Score: Now, let's see if credit limitations have any effect on credit scores. Credit utilization is one of the five elements that influence a credit score, as we covered earlier. The credit card limit and card usage have an impact on credit utilization.
Card Usage/ Credit Limit Equals Credit Utilization
This is determined for each individual card as well as the total number of cards. For example, if a credit card has a maximum of Rs. 100,000 and the average billing for that card are Rs. 35,000, the card's utilization is 35%. If there is another card with a limit of 150,000 and an average usage of Rs. 35,000, the utilization ratio for that card is 23.33 percent, and the utilization ratio for both cards is 28 percent.
As a result, the credit utilization of all cards, both individually and collectively, is taken into account when calculating the score. A high credit use ratio is detrimental to one's credit score. So, if someone's credit card usage is consistently high (more than 30% of the sanctioned amount), they should consider getting a higher card limit sanctioned.
Increasing the credit limit will assist the user in dealing with the high credit utilization ratio; a high credit utilization percentage on a consistent basis may result in a negative CIBIL score. After repayment history, this is the most important factor in determining a credit score.
However, keep in mind that a greater credit card limit will only help if you can pay your credit card bills on time and keep your spending under control. A greater credit limit is not an excuse to spend more, as this would defeat the point of having it raised in the first place and could lead to more serious problems if you do not pay your bills on time.
Why is it a problem to have a high credit utilization rate?
One could wonder why high utilization is a concern if he or she can pay off their credit card debt on time and spends within the sanctioned amount. It's a problem because it discloses the cardholder's credit-hungry habit. It also implies that the cardholder has a high-risk profile, both of which are bad signals for credit health.
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