What is a credit card limit and why is it crucial for your finances? | Mint

Credit limits in credit cards greatly impact your money decision making. This makes one credible to some amount or ability to buy at that set purchasing power through charge made at card usage.

Understanding credit cards

A credit card is a type of plastic card issued by a financial organisation that specifies the amount you can borrow. You can use it to buy things without cash or credit cards. That is, you borrow money from the credit card provider when you use it, and you normally have to pay it back later with interest.

What is a credit card limit?

The maximum amount with which you are allowed to spend using a particular credit card is specified by your bank or credit card issuer. The key determining factor is income, although other criteria, such as your credit score, the type of card you apply for, and the standards of the issuer, also come into play. If you’ve never used a credit card before, you’re likely to have a small limit initially, which you can increase by using it responsibly.

How are credit limits set?

The issuing company determines your credit limit when you apply for one based on various factors such as:

• Income and commitments: The more you will repay, the more credit-worthy you are.
• Age and work status: limiting factors would be experience and regular income.
• Credit history and score: lenient restrictions often result from a good credit history.

How does the credit limit affect your credit score?

Your credit limit exerts a massive influence over your credit score, an indication of your creditworthiness. One critical metric that forms the part of this computation is your credit utilisation ratio-that percentage of available credit you’re employing. You need to maintain or raise your credit score, therefore this ratio should be under 30%.

In conclusion, knowing and keeping track of your credit card limit leads to financial stability. You might enjoy all the benefits that you get with credit cards by sticking to your limit, paying your bill on time, and keeping your utilisation ratio in control. Use your credit card responsibly, as credit cards come with their own sets of risks, which can lead you to fall into a debt trap if not used in a proper manner.

(Note: Using a credit card carries its own set of risks)