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Want to spend more this festive season on your credit card? This is what it takes...
Sneha Bhagwat, owner of an export firm, was a globe trotter. She heavily depended on her credit card for travel bookings and expenses around the world. With the rising dollar and depreciating rupee Sneha wanted an immediate increase on her credit card limit. She approached her credit card relationship manager to request for increasing the limit on her credit card. The relationship manager briefed her in detail on the process of decision and the factors that are taken into consideration while deciding the increase in credit card limit:
What is credit card limit and how is it decided?
When you sign up for a credit card you are requested to fill up a form providing details of your income, KYC (know your customer) and employment. Based on the details you provide the credit card company first checks your CIBIL TransUnion Score and CIBIL Report to assess your credit history and past credit behaviour. If your CIBIL TransUnion Score meets the cut-off limit of the credit card company and they are satisfied with your CIBIL Report, they proceed to decide your credit card limit, rate of interest and terms and conditions on your card.
The monthly limit on your Credit Card is the maximum amount which the Credit Card issuer has contractually agreed to lend you per month. The annual limit on your credit card is determined by your card eligibility criteria based on your income. Some credit card companies also decide the credit limit based on your credit history and you credit score.
Credit Card limits are designed to make sure that you can conveniently and surely repay the money you borrow without getting into a debt overload.
Each credit card company has its own set of policies and criteria for deciding on the credit card limit. The credit limit is a function of the borrower's income and usage. The crucial factor that determines it, though, is sourcing of information about you by credit card companies. The companies do the sourcing in two ways -- through income documents that you submit, such as the salary slip and the income tax return, and surrogate methods such as your association with a brand, a merchant outlet or a premium club.
Some credit card companies may also consider the applicant’s credit history and credit score along with her/his income to debt ratio for deciding the credit limit on the card.
Can one spend over and above the credit card limit?
Most credit cards allow the credit card holder to spend up to a capped amount over and above the limit assigned on the card. However in most cases there is a surcharge or additional fee to be paid if one crosses the credit card limit for the month.
It is advisable to stay within your credit card limit. While increased spending on your credit cards may not necessarily negatively affect your CIBIL TransUnion Score, an increase in the current balance on the card over time is an indication of an increased repayment burden.
What are the criteria for getting an increase on the credit card limit?
Most banks make you eligible for getting an increase on your credit card limit after 6-18 months of you availing and using the credit card, depending upon their credit policy. They take a two pronged view on the decision of increasing the limit: How have you been using and paying dues on the existing credit card and how have you been faring across your other credit relationships as reflected in your CIBIL Report and CIBIL Transunion Score?
Based on these assessments, banks decide on increasing your credit limit. Can banks decrease the limit on your credit card? Yes, if your credit behaviour as reflected in your CIBIL Report and CIBIL Transunion Score is showing or hinting at a possible default or delinquency on loan and credit card payments.
Credit Card issuers conduct regular portfolio reviews on their borrower’s credit behaviours and may lower the credit limit if they find any sign of a possible default. A high CIBIL TransUnion Score and healthy credit behaviour reflected in your CIBIL Report along with your income details may work in your favour for getting an increase on your credit card limit.
Having understood the process and factors impacting the credit card limit, Sneha first accessed her CIBIL Report and CIBIL Transunion Score and reviewed her credit history. As the dollar was appreciating, so was her income from her export business. A healthy CIBIL Report and high CIBIL TransUnion Score coupled with increased income enabled Sneha avail higher limit on her credit card and the financial freedom that came with it.
Photograph: Pedro Ribeiro Simões/Creative Commons
Harshala Chandorkar is Chief Operating Officer, CIBIL