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What Does Credit Limit Mean on Credit Card?

Credit has become quite a popular source of funding for many of us, whether for personal or business expenses. Accordingly, a number of credit lending options too are available, credit card being amongst the most popular ones. You would have experienced tele-callers calling you with unbelievable offers on credit card. Some even make it sound as if you can spend unlimited amounts using a credit card. The reality, however, is very different- credit card spends are governed by various rules, credit limit being one of them. Here is a look into the basics of credit limit, what credit limit mean on credit card, and how you should manage it to make the most of your credit card.

How Does a Credit Card Work?

One must first understand how a credit card works. A credit card is essentially a card issued by a lender which allows you to borrow money from the lender up to a certain limit, which is usually set on a monthly basis. Credit cards can be either secured on unsecured. Unsecured credit cards are mostly more popular because they help you spend without setting any collateral. Lenders also run different attractive schemes on credit cards, to allow you to spend specifically on elements such as travel, dining, shopping and other lifestyle requirements.

You can select a credit card that suits your requirement. Some credit cards come with an interest-free period, which is great because it costs you no additional money. However, for most credit cards, you need to pay interest if you do not pay your monthly balance in full. Here is where the concept of “minimum credit limit on a credit card” comes into the picture.

What Does Credit Limit Mean on Credit Card?

Contrary to popular perception, you cannot borrow endless amounts of money on a credit card. Every credit card comes with a certain available credit definition. This is defined on monthly basis. Credit limit is the maximum amount of money (credit) that you can borrow from your credit card company in any given month. Credit limit may not be always at a fixed value, it may vary within a range of minimum and maximum. The meaning of minimum credit limit is the least amount of credit that the bank will offer you on application. The maximum limit is the most that the lender will offer you to borrow.

How is Average Credit Limit Decided?

When you apply for a credit card, the lender first assesses your credit worthiness by looking at your CIBIL score and financial status. This is done to ensure that you have the financial capability to pay your credit card dues in full, and not default on payments going ahead.

Increasing Credit Limit on Credit Card

The highest credit limit on a credit card varies by the lender and by your financial profile; a high credit limit on a credit card is generally given to those who maintain an impeccable credit record. This means you must keep your credit utilisation low. You must not use multiple credit cards parallelly. Remember to repay credit card debt as per your credit limit each month. Also, try to repay the entire credit outstanding in full. Following these measures will help you build trust with the lender, and they can consider increasing your credit limit.

Long tenure with a lender is another reason for increasing the credit limit, you may be eligible for an increase after 6-18 months of lending from a particular lender. Nowadays a range of lenders offer credit cards- right from banks to financial institutions to online lenders like MoneyTap, it is a good idea to develop an ongoing relationship with your lender. Despite this, there is a limit to how much your credit limit will be increased, generally it is between 1.25-1.5 times your existing credit limit.

Shiv Nanda

Shiv Nanda

Shiv Nanda is a financial analyst at MoneyTap who loves to write on various financial topics online. He also advises people on financial planning, investment choices and budgeting skills, and helps them make their financial lives better.

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