What is a credit limit? How It Works in Loans and Credit Cards

Key Insights

1. A credit limit is the maximum amount a bank lets you borrow on a credit card or line of credit.

2. Your available credit decreases as you spend and increases as you repay your debt. This revolving nature lets you reuse funds as long as you stay within your limit and make timely payments.

3. Showing responsible financial behaviour, such as paying bills on time and using a low percentage of your limit, is the best way to increase it.

The highest sum of money that a bank permits you to spend with your credit card is known as your credit limit. It's similar to a short-term loan that you can take out but have to repay later.

• Imagine Payal loves shopping. Her bank gave her a credit limit of ₹50,000.
   
• She spent only ₹15,000 on clothes and accessories.
   
• Now, she still has ₹35,000 left to spend before reaching her limit.
   
• This enables her to make more purchases without immediately using her own funds.

Understanding Credit Limit Through a Simple Table

Below is a table that breaks down Payal’s credit limit in a different way:
 

This table helps you see how much Payal can still spend.

This article helps you understand what a credit limit is. Payal’s example shows that even after shopping, she has more money available in her credit limit. This article is all about thoroughly explaining credit limits.

How Does a Credit Limit Work?

The most you can borrow with a credit card or loan is known as your credit limit. You can spend up to the determined amount, pay it back, and then use it again, making it work similarly to an emergency fund.

Understanding Credit Limit with Rahul’s Example

Rahul's credit card has a limit of ₹2,00,000. One day, his friend had an accident and needed emergency money. Rahul paid with his credit card:

• Hospital bills: ₹1,20,000
• Medicines: ₹30,000
• Other expenses: ₹20,000

Total spent: ₹1,70,000
 

Remaining credit limit: ₹30,000

Rahul needs to pay back the money to refill his credit because he used up the majority of his limit. If he repays ₹50,000 next month, his available credit increases back to ₹80,000.

Key Points on How Credit Limits Work
 

• You can spend up to your limit (₹2,00,000 in Rahul’s case).
   
• The more you spend, the less credit remains until you repay.
   
• If you repay what you owe, your available credit goes back up.
   
• Exceeding the limit can lead to extra fees or blocked transactions.

Credit Limit Breakdown (Simplified View)

The following table provides a different explanation of Rahul's credit limit usage:
 

This table helps you see how Rahul’s spending affects his remaining credit.

Such a table helps you to understand:
 

• Total Borrowing Power: The Maximum amount Rahul can spend.
   
• Amount Already Used: How much he has spent.
   
• Funds Still Available: What’s left for future use.

This article used Rahul's example to clearly explain how credit limits work. You now understand how your available credit is impacted by borrowing, spending, and repaying debt.

Bonus Tip: Your credit limit is the maximum amount you can spend across all transactions, while your cash withdrawal limit is a smaller amount reserved for ATM cash withdrawals. Cash advances typically incur high interest from the start and may include extra fees.

Factors That Determine Your Credit Limit

The highest amount that banks will let you borrow is known as your credit limit. It is not random; banks decide it based on several important factors about your financial life.

Understanding Credit Limit Factors with Devam's Example

When Devam applied for a credit card, the limit was ₹1,50,000. Riya, his friend, also applied, but was only granted ₹50,000. What's the difference? Because banks look at a variety of factors before setting limits:

• Devam's Situation:
  • Monthly salary: ₹75,000
  • Existing loans: ₹0
  • Credit score: 780 (Excellent)
  • Credit card history: 4 years (Always paid on time)
     
• Riya's Situation:
  • Monthly salary: ₹35,000
  • Existing loan: ₹2,00,000 (Car loan)
  • Credit score: 650 (Average)
  • Credit card history: New user

Devam's higher limit can be explained by the fact that the bank views him as less risky.

Key Factors That Affect Credit Limits
 

1. Income: Higher income means higher limits (Devam earns more than Riya)
    
2. Existing Debts: More loans = Lower limits (Riya's car loan reduced her limit)
    
3. Credit Score: Good score = Higher trust = Bigger limit
    
4. Repayment History: Late payments = Lower limits
    
5. Credit Age: Longer credit history helps (Devam has 4 years of good history)

Credit Limit Factors Explained Differently
 

This table helps you see why banks give different limits to different people.

Such a table helps you to understand:
 

• Banks don’t just randomly assign limits; they carefully and patiently check your financial health.
   
• Each factor either increases or decreases your credit limit.
   
• Managing these factors well can help you get higher limits over time.

This article explained the key factors that decide your credit limit in simple terms with Devam’s example. Now you know why limits vary and how to increase yours.

Bonus Tip: Many banks review accounts every 6-12 months and may provide automatic increases for customers with good payment history and increased income. You can also request an increase proactively through your bank's app or customer service.

How to Improve Your Credit Limit

The highest amount you can spend on your credit card is known as your credit limit. Increasing it gives you more financial flexibility when needed.

Amit's Journey to a Higher Limit:

Amit started with a ₹50,000 limit. After 1 year of smart habits, his bank increased it to ₹1,00,000. Here's how he did it:

Ways to Boost Your Credit Limit:
 

This table shows different approaches to growing your credit limit.

Amit's example shows that anyone can raise their credit limit with dedication and sensible behaviour. Pay your bills on time and use your credit effectively right now!

Conclusion 

The main goal of raising your credit limit is to show creditors that you are a responsible borrower. Like Amit, you can raise your limit by maintaining previous credit, paying your bills on time, and using less of your available credit. 

Keep in mind that before they will trust you with more, banks want to see that you can manage money. Over time, little actions like keeping your income information up to date and avoiding late payments add up to a significant impact. 

Consider it a form of trust-building; the more trustworthy you are, the freedom you will have. You could soon obtain the higher credit limit you require for emergencies or significant purchases if you start with positive habits today.

FAQs

How is a credit limit different from a cash withdrawal limit?

Your credit limit is the maximum for all transactions. The cash withdrawal limit is a smaller part of this, used for ATM cash withdrawals. Cash advances often incur high interest and fees immediately.

What's better, one card with a high limit or multiple cards?

One high-limit card is usually better for your credit score. Too many cards can make managing payments harder.

Do debit cards have credit limits?

No, debit cards only spend what's in your bank account. Credit limits apply only to credit cards and loans.

What should I do if my credit limit is too high and I'm tempted to overspend?

If a high limit poses a risk to your financial discipline, you can contact your bank and request a lower credit limit. This can be a valuable strategy to help you control spending and avoid accumulating debt you cannot repay.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?