Several Indians have taken a shine to credit cards, buying essentials like groceries, paying utility bills and purchasing exclusive holiday packages. Significantly, credit card use surged when the lockdown due to the pandemic came about, with more Indians getting used to the idea of convenient payments made from the confines of their homes.
Small cities took the lead in applying for new credit cards. More women in India have also been applying for them. Credit cards are sound digital payment devices that provide a line of credit so you can afford things anytime, and pay without any bother later. Nonetheless, it is vital that you know the whats and hows of credit card functions so you can make the most of them. Whether you select the best credit card for shopping or the most basic credit card, every credit card comes with charges, fees and certain limitations.
As much as credit cards offer rewards and perks, they’re packed with “read between the lines” cautions that you must pay heed to. One of these is the credit card limit that is fixed for every individual card. Typically, credit limits are the maximum amount of funds that a lender (the card issuer) permits the user to spend while using the card. The limits are set by banks and finance companies, based on user information.
Understanding Credit Limits
A bank or a finance company issues credit cards to users. They are, in the most basic way, lenders offering the user a line of credit, and the user has to pay them back. These issuing authorities evaluate the personal sources of income, loan repayment history, and salary slips of users while determining the credit card limit.
A credit rating is an examination of the creditworthiness of a user, with respect to whether he/she has an outstanding debt or not. All these factors regarding an individual’s finances act as a credit card limit calculator India has banks or finance companies that issue credit cards and will give high-risk applicants low credit limits as they may lack the capital to repay borrowed money. Low-risk users may get higher credit limits as they show an ability to pay back what’s owed, and this gives users greater flexibility when they spend.
Caution While you Spend
While banks and financial institutions encourage the use of digital payments, limits are set on spending amounts. If you already have a credit card, and apply for a new one, your credit card history will likely act as a benchmark for setting a limit on the new card. Although you may want the best credit card for shopping, with high credit limits to afford items, this may not happen. When you apply for a credit card, the issuing authority will ask you to submit certain documents, like your PAN card and income tax documents, salary statements, etc. In such cases, the card issuer generally uses a multiplier with your gross monthly income. This could be 2 – 3 times the gross salary earned depending on a user’s other risk factors and the policies of credit of the issuer. This is not the only deciding factor of setting credit limits, and as mentioned before, other aspects of the user’s financial health are considered.
The following key factors determine how banks/finance companies set credit card limits:
- Gross monthly salary/tax returns
- The ratio of debt-burden – Supposing users are in the midst of paying back loans, the card issuer calculates your fixed monthly financial obligations (like a home loan/EMIs) and deducts these amounts from salary earned. The total of all debts divided by the monthly salary is the debt-burden ratio. A part of this could be set as the limit on a credit card
- Previous spending patterns
- Credit disbursal policy of issuers