How many bank staff have you asked this question to? “What would be my credit limit if I apply for this card? And everyone will claim they don’t know. One reason is that banks restrict their employees from telling consumers about the credit limit and another is because several elements influence bank decisions that salesmen are unable to understand. Some of the elements influencing your credit limit when you apply for a new credit card are listed below.
Important factors that affect your credit limit:
Your Salary/Income:
The average credit limit is two or three times more than your monthly salary. Suppose your salary is Rs. 50,000 per month then your credit limit should be between Rs. 1 lakh to Rs. 1.5 lakhs. If you are self-employed and you’ve filed an income of Rs. 5 lakhs for the previous financial year, then you may expect a credit limit of between Rs. 1 lakh to Rs. 2 lakhs. Business cards often have a higher limit for obvious reasons.
Your Account with Issuing Bank:
This is important if you’re applying for a credit card based on your salary or saving account. Credit cards from HDFC/AXIS are easy to get in this manner, as long as your account has a certain number of transactions each month. Banks are aware of both your transactions and the extra goods you have used from the bank. Suppose you are using FD, RD, or insurance plans from the same bank, your relationship value with the bank and your credit limit is likely to be higher.
Current Loans/EMIs:
Your expected credit limit would be greater if your monthly salary is Rs. 50,000 and you are paying an EMI of Rs. 30,000 on your house loan each month. This is because your cash flow will be reduced in half, making it harder for you to pay expenses. So banks are aware that you only have Rs. 20,000 to spend, so you shouldn’t expect a limit like Rs. 1 lakh or such.
Your Credit Score:
Everything must be alright if your credit score is 750 or more. A lower score could result in a lower limit even if your salary is high. Also, your estimated credit limit may be negatively harmed by any current errors discovered on your other loan accounts or credit cards, and your application may even get rejected.
The Ratio of Debt-to-income:
Firms use your debt-to-income ratio when determining whether to accept or reject your credit card application. In general, if your debt-to-income (DTI) ratio is more than 40%, then you won’t be able to pay the credit card’s monthly payment and all your other bills.Here is a formula for figuring out your debt-to-income ratio.
Debt-to-income Ratio = Debt payment each month ÷ Your Monthly Gross Income
Let’s say your monthly income is Rs. 48,000 and you are paying about Rs. 32,000 in credit card debt, mortgage, auto, and other loan payments. Your DTI (Rs. 32,000 ÷ Rs. 48,000 = 66%) is 66%, which is a high ratio that can cause a credit card company to reject your application.
Conclusion
Now that you are aware of what credit limits are and how they might impact your credit score, be sure to compare the credit limits of several cards to determine which one is best for you. Once you receive your new credit card, avoid using more than 30% of the total credit limit, and make sure to pay always on time to gradually increase your creditworthiness.
