Did you know: Impact of changing the credit limit

Have you received calls from your bank indicating that you are entitled to an increase in your credit card limit? How should you respond to a credit limit increase offer – yes or no? Is your spontaneous answer “yes”? Read on to find out why this might not be the right decision.

How is the credit limit set?

A credit card limit is the maximum amount you can spend on your credit card. It is predetermined by the card-issuing bank, mainly based on your income, debts, spending habits and repayment history. You can spend more than the limit, but it incurs hefty over-limit fees, at least 500.

Banks generally sell credit cards to existing customers. For example, if you are a customer of bank XYZ and have a salary or savings account with them, chances are you will be sold a credit card from that bank. He cannot ask for supporting documents such as your tax return because he may already have this information.

Banks usually take a conservative approach: they pick out your salary or savings account details and set an amount as a credit limit based on that. Once a bank has established a relationship with you, they will track your spending behavior. Depending on the spending pattern and income stream, your credit card limit will need to be increased or reduced.

You are likely to get an enhanced credit limit eligibility appeal if you regularly pay your credit card bills and have a steady stream of income. But if you’re renewing the credit or you’ve only paid the minimum dues, you’re unlikely to receive an offer for a higher credit limit. In fact, if you haven’t made your credit card payments or there’s a chance you will, your credit limit may actually go down.

The spending limit allowed on your credit card also depends on your income. But earning more doesn’t always mean a higher credit limit. If your income is high and your overall liabilities are high, your credit limit will not be increased. On the other hand, you may earn less but having been careful enough to pay your bills on time, your bank may increase your credit limit.

What should you do?

Banks usually offer a review of the credit card limit after 6 to 18 months of a person owning the card, and a minimum increase of 50%. So, if your credit limit is 2 lakh, the increase in credit limit can be between 3 and 3.5 lakh.

Going back to our original question, accepting or rejecting the offer of an increased credit limit, if a higher credit limit gives you relief, you should opt for it.

One way to do this is to maintain a good credit history. But if you are worried about overspending, you can opt for a temporary improvement. All you have to do is contact the bank via its branch or call center and make your request. The decision, however, will be up to the bank.

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