All You Need to Know About Credit Limit

Right now, some banks are decreasing the credit limit of some customer groups. And this begs the question, which I know many of you are asking as well: what is a credit limit!

What is credit limit and how does it work?

A credit limit is the maximum amount of credit that a borrower can get. It can take the form of a home equity line of credit, a credit card, or other revolving credit accounts. Credit Limit is therefore the maximum amount you can borrow. Lenders set their own credit limit, and sometimes for each customer group. At times, this can even be on a case-to-case and individual basis. For instance, right now some banks are decreasing the credit limit of those working in industries affected by the pandemic, such as the hospitality sector. The level of credit limit normally depends on one credit score, income, payment history, and a range of other factors.

Loans with collateral will utilize the income of the borrower and the property’s value, or the remaining home equity for setting the credit limit. In this article, we shall talk of credit card account vs. other loan types.

Credit Limit and Available Credit

Credit card debt is actually revolving credit, which means that the amount revolves around depending on your monthly payments and fund use. It means you have a limit or ceiling as to how much of the given funds you can use. For instance, if you have a credit card loan of $5000, it is also the maximum amount. Available Credit is the amount of credit left available after spending. For instance, if you spend Rs.3000, the Available Credit is Rs.2000. If you pay back Rs.2000, you’ll have Rs.4000 credit available.

What happens when your credit limit changes?

A lender can increase your credit limit. This can happen if you have been a good customer with a good payment history. It can also happen if you have not maxed out your credit limit. As you can understand, these are ultimately good for your credit score. However, it can be tricky as well. Having a higher credit limit means that you may be induced to borrow more. However, there won’t be problems as long as you continue to pay on time.

There are some cases where your credit limit will reach so high that you will look less attractive as a prospect to lenders. Why? If you have a combined credit limit that is much higher than what you can afford to pay back, lenders will not be likely to give you any more loans. If you have more credit available than what you earn in one year, you may want to ask lenders to lower the credit limit instead. This gives you more access to loans and credit card loans.

There are times where lenders lower your credit limit without you asking. This happens when you are late with payments, default frequently, and struggle to pay, and give off signs that you are not likely to pay back the loan. It certainly happens when you stop paying back the loan. This is bad for your credit score, and places you in greater risk of defaulting on your existing credit limit.

Going beyond your Credit Limit

Earlier, credit card issuers let people overspend and go beyond their credit limits. For the customer, it was beneficial because their transactions are not rejected at retail stores. However, creditors then started charging fees for customers going over their credit limits. This fee was normally $35. Small as it may seem, this amount kept getting added to one’s credit balance, and pulled a lot of people down in debt. Additionally, overspending also initiates an increased interest rate on debt. If you had any credit card rewards, those were soon lost.

As you can understand, lots of people were trapped in a cycle of debt and fees. When new laws were passed to limit this practice by banks, the problems of customers only increased.

Of course, the best course of action to take in this case is to not to go over your credit limit.

How to increase your credit limit 

You can increase your credit limit overall, but that’ll bring some drawbacks as well. Doing so increases the chances of risk exposure and your credit score may get affected as well. However, a new credit account has lower interest rates to start with, and you can get a better deal if you choose Balance Transfer.

A simpler way to increase your credit limit is by asking your creditor. They’ll agree if your credit score is high, if your payment history is good and if your income is sufficient. However, there’s a downside here as well. It brings a hard inquiry on your credit report. What you can do is to look over your credit report on your own beforehand. If there is something negative, do not apply for a credit limit increase or a new credit line. Solve the problem first, and then apply.

The Importance of Reviewing your Credit

Before you apply for an increase in your credit limit, make sure that your credit information is correct. Look at your credit report first, if you do not know where to start from.

Seek debt counseling if you have maxed out your credit limit and now want further increase in your credit limit. Don’t make it worse by getting a new debt.