Factors That Are Interesting In How Your Credit Limit Affects Your Credit Score

What is Credit Limit?

A credit limit is a feature of credit cards; it varies depending on the type of card and other factors. In addition to a number of other factors, the applicant’s income plays a significant role in determining the credit limit when one applies for a card. The credit limit is the most money a cardholder can charge to the given card.

In this case, a card with a Rs. 100,000 then the user can spend up to that amount in a billing cycle. The limit is reset to Rs. once the outstanding debts have been paid. 100,000 for the next billing cycle. In the CIBIL Report, specifics about all of your active credit cards and their credit limits are listed.

Credit Limit’s Effect on Credit Score

Let’s now examine any effects credit limits may have on credit scores. Credit utilization is one of the five factors that affect credit score, as we covered above. Both the credit card limit and the card usage have an impact on credit utilization.

Credit Utilization = Card Usage/ Credit Limit

This is computed for each card individually as well as for the entire deck. Consequently, if a credit card with a Rs. 100,000 and the average billing for that card is If you use that card for Rs. 35,000, the utilization rate is 35%. If another card with a limit of 150,000 is available and its typical usage is also Rs. 35,000 the utilization ratio for that card is 23.33% and for both the cards put together the utilization ration is 28%.

Thus, the credit utilization of each card, both individually and collectively, is considered when calculating the score. The credit rating suffers from a high credit utilization rate. Therefore, if someone’s credit card usage is consistently high (more than 30% of the sanctioned limit), they should consider applying for a larger card limit sanction.

Increasing the credit limit will help the user deal with the high credit utilization ratio; a persistently high credit utilization ratio could lead to a low CIBIL score. The biggest factor in determining credit score is this factor, followed by repayment history.

But keep in mind that a higher credit limit will only be beneficial if you can manage your spending and make on-time credit card payments. A higher limit shouldn’t be used as a justification for spending more because doing so would be counterproductive to the effort to have it raised and could result in more serious issues if you don’t make your payments on time.

The reasons behind high credit utilization.

One might wonder why high utilization is a problem if they can pay their credit card bills on time and keep their spending within the approved budget. It is a problem because it reveals the cardholder’s credit-hungry behavior. Furthermore, it shows that the cardholder has a high risk profile, both of which are bad indicators for the health of one’s credit.