30 JUNE, 2022

Have you ever wondered why credit card limits for individuals of the same age and with the same income differ so much? The credit limit is determined through a complex process called underwriting. Based on the underwriting system, companies decide who to approve the best credit cards at which limit. 

Banks consider multiple crucial factors that determine credit card limits. The credit card limit is primarily a function of an individual's income, debts, and payment history. The sourcing for this information can be income-based sourcing and non-income-based sourcing - the income documents, like salary slips, the income tax return, and other methods, like your association with a brand or a merchant outlet, frequent traveling habits, or your love of fine dining. If banks offer a higher credit limit, be happy as it indicates that your bank trusts you to repay their debt.

Let us shed light on how banks determine the credit limit on your card for clarity.

Key Elements Influencing Your Credit Card Limit

You can find different criteria for the underwriting process to calculate the credit limit on an individual's credit cards. Here are the common elements banks consider to decide on the credit limit.

  • Individual's Credit History and CIBIL Score

CIBIL score is the first thing banks look at while approving your credit card application. Banks or other credit card issuers approach credit bureaus like CIBIL to know an applicant's credit score and accordingly assign the credit limit on cards. Banks take a risk by giving customers credit cards. Therefore, they fix credit limits on cards based on applicants' creditworthiness reflected in their credit history.

Banks are more likely to provide a higher credit limit if an individual has been disciplined to repay the previous debts and maintained a good credit score. In contrast, if a cardholder has shown irresponsible credit behavior to repay earlier debts, banks decline a card request or keep your credit card limit low.

Individuals should know that having no credit history may restrict banks from offering you a credit card as there is no previous data to analyze your repayment behavior that the banks can rely on.

  • Income and Credit utilization

Another vital element to assigning the credit card limit is the applicant's income simply because it is your income that enables you to repay your debts. The higher the income, the better the chances of getting a higher spending limit on the best credit cards. However, credit utilization also comes into play when deciding on credit card limits.

Banks consider your debt-to-income ratio also. They consider your existing debts to repay against your current income and how well you manage them. Numerous debts can increase your debt-to-income ratio, leading to a lower credit card limit. If you have a lot of unused credit card limits, banks consider it a positive sign. A low credit utilization ratio shows that you are a responsible person towards your credit. Banks will be ready to grant you a higher credit limit.

  • Limits on Your Other Credit Cards

Banks also consider credit cues from other credit card providers to set a limit on your credit card. Therefore, they will consider the limit provided on your existing credit cards, especially if it is a new card application. However, if you are already a customer of a bank, it can offer a high credit limit on your new card.

  • Type of Credit Cards

Credit cards differ in various features. If it is a card with a predefined credit limit, it will allow a specific credit limit irrespective of the other factors given above. There will be a fixed credit limit if it is a co-branded card or a card secured against your fixed deposit on the card. Suppose it is a premium card with a particular credit limit. Existing customers can get this card with a higher limit. In contrast, if a new customer applies for a basic card, they might not get a high-limit credit card even if their income and credit score is good. This is simply because the bank has set a limit for the maximum spending on the basic card.

  • Time Factor

Time is also another deciding factor. If an individual has been a bank customer for a long time, it can offer a high credit limit and your overall credit report. Even if the customer does not have previous debts with the bank, it can consider offering a credit limit with a high spending limit. Another scenario is that the credit policy in the economy might have changed, and banks have to be more cautious with credit disbursals. You can find a difference between the credit card limit issued two years back, and that issued this year.

These are the elements that a bank can consider to offer a credit card limit to its new and existing customers.

How to Increase Credit Limit

1. You must maintain a high credit CIBIL score to enjoy an increased credit card limit. You can use your credit card to make grocery payments, monthly fees, and dining bills and pay the credit card on time. It will show your creditworthiness and help to increase your CIBIL Score.

2. It will be best if you can reduce your financial obligations before requesting an increase in your credit card limit.

3. It is necessary to repay dues on time. Do not miss any loan or credit card EMI. It is best to pay the credit card bill in full every time.

4. With a salary hike or identifying another source of income, you can get an increase in your credit card limit.

5. Avoid utilizing all your credit limits on your card. Keep the Credit Utilisation Ratio between 30-40%.

6. If your bank is offering a new credit card, accept it no matter what the credit limit is. It shows the trust of your bank that you can repay the credit. Also, the bank may increase your credit limit soon.

Thus, companies understand what you are looking for and how well you can manage your credit before assigning a credit limit on your cards.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.