Smart tips to manage your credit limit well!
No doubt we all love to have a credit card, in fact, it is our best friend these days. With an array of expenses, it is easier to handle monthly budget with the help of a credit card. However, there are always two sides of a coin. While having a credit card eases down the financial burden, if not handled responsibly, it could even have reverse effect on your financial health. Therefore, it is significant to utilize your available credit limit with care if you really want to continue enjoying your financial freedom.
So here are few smart ways to deal with your credit card to get the maximum out of it.
Ask for higher limit – Every credit card company has set criteria to issue credit limit for the users. So, if you’re opting for a new credit card, make sure to check out the eligibility criteria and then ask for higher limit. However, keep in mind that higher limit doesn’t means you’ve got more power to spend. Higher credit limit is just a way to manage your finances well, while keeping the credit scores high. Your credit utilization has 30% impact on your overall credit scores. Therefore, opting for higher limit would save you from exceeding the utilization limit above 30%.
Pay your dues in full – Most credit card users often carry heavy outstanding dues to subsequent months not knowing that this brings dire consequences to their overall financial health. It may be noted that credit cards impose high interest rates on outstanding dues. Carrying unpaid dues for months could impose heavy penalty charges, while also hampering your credit scores. In some cases, credit card companies also revise the credit limit in view of your poor financial management. Therefore, it is advised to pay off your dues in full every month and not just the minimum outstanding. This will save you from paying heavy interest charges, while keeping the credit scores intact.
Opt for EMI facility wisely – Most of the credit cards also come up with EMI facility, though it is advised to get the facility only when it is required. Switching to EMI options unnecessary would ultimately put your credit limit at risk as banks levy finance charges along with processing fees. This will only add financial burden upon you.
Avoid cash withdrawals – Most common mistakes that the credit card users make is withdrawing cash using their credit cards. Even though the card comes up with specific cash limit, it is advised to not to withdraw cash from a credit card unless it is extremely necessary. This is because there are certain charges for cash withdrawals using a credit card. In case of an emergency, if you withdraw cash, make sure to pay back the amount at the earliest. Credit cards charge interest on daily basis and carrying outstanding dues for longer would have a direct impact on your overall credit limit.
How credit card companies determine credit limit?
When you apply for a new credit card, the first thing that you’re excited about is the credit limit. However, not everyone is lucky enough to have higher limits. This is because there are certain factors that the credit card company goes through to determine the credit eligibility. So, let’s go through the factors that are used to determine the credit limit.
Credit history – The first thing that banks or credit card companies access is your credit history to check how regular and responsible you’ve been with your financial dealings so far. Remember, repayment history has a huge impact on your financial health, accounting for around 30% of overall credit scores. Thus, even a single default payment could drag down the scores by 40 to 80 points. Hence, it is significant to ensure timely repayments to make an impression of a disciplined borrower and thus, ask for higher limits.
Credit limit on other cards – If you’re an existing cardholder, then your active credit cards can play a major role in determining the limit for a new credit card. Whenever you apply for a new card, banks ask for cues from existing credit card companies before setting a limit on a new card. For instance, if your existing card already has higher limit, chances are that your new credit card company would also approve higher limits. On the other hand, if your active card has lower limit (say Rs.50000), then it would be difficult to qualify for higher credit limit(say Rs.2 lakh) right away.
Debt to income ratio – Another factor that the banks are concerned about is your debt to income ratio. Credit card companies want to be every bit sure that they’re not risking their funds by approving a new credit card to someone who is already debt ridden. Therefore, they always consider applicant’s debt to income ratio to determine whether they can expect timely repayments every month or is there any credit risk involved. Hence, the size of your existing debts and your monthly income play an important role in determining the credit limit.
Credit category – It is quite an understood thing that every credit card comes with unique features and falls into a different category such as basic, shopping, elite, and premium. Thus, if you already have a credit card that belongs to elite category, then you’ll ultimately qualify for higher limits. On the other hand, if your existing card belongs to basic category, then it would be quite difficult to get higher credit limits even if you have 5-digit monthly income and an excellent payment history.