Interesting Factors On How Credit Limit Impact Your Credit Score
What is Credit Limit?
Credit cards come with a credit limit; this limit varies from one card type to another and is dependent on various factors. The income of the applicant is one of the main factors that determine the credit limit when one applies for a card apart from a host of factors. Credit limit is the maximum amount that is a card user can spend on the issued card.
Thus if a card has a limit of Rs. 100,000 then the user can spend up to that amount in a billing cycle. Once the dues are repaid then the limit is again set to Rs. 100,000 for the next billing cycle. Details about all your active cards along with their limits are mentioned in the CIBIL Report.
Impact of Credit Limit on Credit Score:
Now let us explore the impact of credit limits on credit rating if any. As we discussed above credit utilization is one of the five factors that impact the credit score. Credit utilization in turn is affected by the credit card limit and the card usage.
Credit Utilization = Card Usage/ Credit Limit
This is calculated for each card and also all cards put together. Thus if there is a credit card with a limit of Rs. 100,000 and the average billing for that card is Rs. 35,000 then the utilization for that card is 35%. If there is another card with 150,000 and the average usage for that card 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 when the score is being calculated then the credit utilization of all cards individually and collectively is taken into account. A high credit utilization ratio is not good for the credit rating. So if someone has a constantly high credit card usage (more than 30% of the sanctioned limit then they should look at getting a bigger card limit sanctioned.
Getting a bigger limit will help the user deal with the high utilization ratio; a constantly high credit utilization ratio could result in low CIBIL score. This aspect after repayments history is the biggest contributor to the credit score.
However do remember a higher limit for your credit card will only help if you are able to pay your credit card dues on time and keep your spending in check. A higher limit is not an excuse to spend more, as this will defeat the purpose of getting it increased and may lead to bigger problems if you fail to pay the dues on time.
Why is High Credit Utilization a Problem?
One may wonder if he/she can repay the dues on time for their credit card and the spending is within the sanctioned limit then why is high utilization a problem? It is a problem because it reveals credit hungry behavior on part of the card user. It also indicates a high risk profile for the card user, both of which are not good signs for credit health.
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