What is a credit card limit and why is it crucial for your finances?

Credit limits in credit cards greatly impact your money decision making. This makes one credible to some amount or ability to buy at that set purchasing power through charge made at card usage.

Understanding credit cards

A credit card is a type of plastic card issued by a financial organisation that specifies the amount you can borrow. You can use it to buy things without cash or credit cards. That is, you borrow money from the credit card provider when you use it, and you normally have to pay it back later with interest.

What is a credit card limit?

The maximum amount with which you are allowed to spend using a particular credit card is specified by your bank or credit card issuer. The key determining factor is income, although other criteria, such as your credit score, the type of card you apply for, and the standards of the issuer, also come into play. If you've never used a credit card before, you're likely to have a small limit initially, which you can increase by using it responsibly.

How are credit limits set?

The issuing company determines your credit limit when you apply for one based on various factors such as:

• Income and commitments: The more you will repay, the more credit-worthy you are.
• Age and work status: More limiting factors would be experience and regular income.
• Credit history and score: More lenient restrictions often result from a good credit history.

How does the credit limit affect your credit score?

Your credit limit exerts a massive influence over your credit score, an indication of your creditworthiness. One critical metric that forms the part of this computation is your credit utilisation ratio-that percentage of available credit you're employing. You need to maintain or raise your credit score, therefore this ratio should be under 30%.

How to increase credit card limit?

• Use your card wisely: You can prove yourself responsible by using your card regularly and consistently, by keeping your credit utilisation around 30%.
• Request a limit increase: Visit your bank and request a higher limit. If you have good grounds, such as higher income, many issuers will grant such requests.
• Pay your bills on time: Banks will gradually increase your limit if you make your payments on time because it shows that you're responsible with your money.

Benefits of higher credit limit

1. Better credit utilisation ratio: A bigger limit results in better credit scores because it decreases your utilisation percentage.
2. Emergency support: When a medical or financial emergency arises, the increased limit acts as a cushion.
3. Exclusive benefits: Sometimes, credit cards with higher limits are also associated with better rewards and cashback deals and other benefits.
4. Easy approvals for loans: A person is likely to receive personal loans easily if he or she has a huge credit limit with minimal usage, thus enabling banks to believe that he or she is a good borrower.

In conclusion, knowing and keeping track of your credit card limit leads to financial stability. You might enjoy all the benefits that you get with credit cards by sticking to your limit, paying your bill on time, and keeping your utilisation ratio in control. Use your credit card responsibly, as credit cards come with their own sets of risks, which can lead you to fall into a debt trap if not used in a proper manner.

(Note: Using a credit card carries its own set of risks)