Credit Limit
Updated on October 4, 2023
The credit limit refers to the highest permissible amount that a cardholder is allowed to spend using their credit card. It serves as a financial boundary that outlines the maximum extent to which the cardholder can make purchases, obtain cash advances, or conduct other transactions using the credit card. This limit is predetermined by various factors and considerations, and it fundamentally reflects the lender’s assessment of the cardholder’s creditworthiness and ability to repay the borrowed funds.
What are the factors affecting credit limits?
The factors affecting credit limits for a cardholder are mentioned below.
Credit Profile – Card issuers evaluate the card holder’s credit history, income, employment stability, and financial aspects, with a favourable credit history and higher income often leading to a higher credit limit.
Card Type – The credit limit is influenced by the type of card owned, like basic, standard, gold, platinum, or rewards cards, determined by the card’s features and the customer’s creditworthiness.
Risk Assessment – Credit card companies assess the potential risk of extending credit to a cardholder, considering their payment history, debts, and credit utilization ratio.
Income Level – A cardholder’s income plays a pivotal role in determining their credit limit, with higher income usually resulting in a higher limit due to a greater ability to repay borrowed funds.
Debt-to-Income Ratio – Lenders also account for the cardholder’s debt-to-income ratio, reflecting the proportion of their monthly income allocated to debt repayment, influencing the credit limit positively if lower.
