A credit card has now become an important financial tool, enabling a host of financial transactions. You can earn rewards by using a credit card for shopping, hotel bookings, flight tickets and other transactions. For most credit card holders, the credit limit is a key consideration while choosing a card. A credit card with a higher limit is often preferred by customers.
A credit card limit is the maximum amount you can borrow on your card at any given time. Banks and financial institutions set this limit based on factors like your income, credit score, repayment history and existing debts.
However, a higher limit isn't always better. A limit that's too high can lead to overspending, while one that's too low may not meet your needs. So, it's important to know the right credit card limit for you.
Here are some key factors to take into account while evaluating the appropriate credit limit of your credit card.
How To Determine The Right Credit Card Limit
Assess Your Monthly Income
Your income determines your repayment capacity. It is a primary factor banks consider when assigning a credit card limit.
A common rule of thumb is that your credit card limit should be two or three times your monthly income. For example, if your monthly income is Rs 60,000, a limit of Rs 1.2 lakh to Rs 1.8 lakh would be reasonable.
However, the limit varies based on your creditworthiness and the bank's policies.
Consider Monthly Expenses
Your credit card limit should cover regular expenses, including rent, groceries, utilities and EMIs. While you must avoid too much unnecessary spending, the credit card limit should be enough to take care of any unexpected spending.
Debt-to-Income Ratio
Your debt-to-income ratio measures how much of your income goes toward debt repayments, such as EMIs. A high debt-to-income ratio indicates you must opt for a lower credit card limit to avoid over-borrowing.
Credit Utilisation Ratio
The credit utilisation ratio is the percentage of your credit limit that you use. A low limit may lead to high utilisation and this can hurt your credit score. For example, if you spend Rs 50,000 out of a credit card limit of Rs 1 lakh, your credit utilisation ratio will reach 50%. This negatively impacts your credit score. Generally, financial advisors suggest keeping the credit utilisation ratio under 30%.
Account For Lifestyle Expenses
Your lifestyle influences your credit card limit needs. If you frequently travel, shop online, or dine out, a slightly higher limit may be useful, especially for cards offering rewards on such spending.
On the other hand, if you want to buy a home or fund education, a lower limit can help you avoid impulse purchases and stay focused on long-term financial health.
To conclude, the right credit card limit depends on your income and expenses. A limit of two to three times your monthly income could be suitable initially. If you're unsure about your ideal credit card limit, you can consult your bank or a financial advisor before choosing a card.
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