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Interesting Factors Regarding How Your Credit Limit Affects Your Credit Score

December 2, 2022 by superuser

What is Credit Limit?

Each type of credit card has a different credit limit that is based on a number of variables. Along with a number of other factors, the applicant’s income is one of the key factors that affects the credit limit when someone applies for a card. The credit limit is the most that a cardholder can charge to the given card.

In this case, a card with a Rs. 100,000 then the user can spend up to that amount in a billing cycle. The limit is reset to Rs. once the outstanding debts have been paid. 100,000 for the next billing cycle. The CIBIL Report contains information about all of your active credit cards, including their limits.

Impact of Credit Limit on Credit Score:

Let’s now examine any effects credit limits may have on credit scores. One of the five factors that affect credit score is credit utilization, as we covered above. The credit card limit and card usage have an impact on credit utilization as well.

Credit Utilization = Card Usage/ Credit Limit

Both for each card individually and for the entire deck, this is calculated. Therefore, if a credit card with a Rs. 100,000 and the average billing for that card is 35% of that card’s available balance, or Rs. 35,000. If another card with a limit of 150,000 is available and its typical usage is also Rs. 35,000 the utilization ratio for that card is 23.33% and for both the cards put together the utilization ration is 28%.

The credit utilization of each card, both individually and collectively, is therefore considered when calculating the score. The credit rating is negatively impacted by a high credit utilization ratio. Therefore, if a person consistently uses more than 30% of the sanctioned credit card limit, they should consider applying for a larger card limit.

Increasing the credit limit will assist the user in managing the high credit utilization ratio; a persistently high credit utilization ratio may lead to a low CIBIL score. The biggest factor in determining credit score is this factor, followed by repayment history.

However, keep in mind that a higher credit limit will only be beneficial if you are able to pay your credit card bills on time and control your spending. A higher limit should not be used as an excuse to spend more money because doing so will defeat the purpose of having it raised and could result in more serious issues if you don’t make your payments on time.

Why Is High Credit Utilization a Problem?

If one can use a credit card responsibly and pay off the balance on time, why is high utilization even a concern? It’s a concern because it shows that the cardholder has a credit-hungry attitude. Additionally, it suggests that the cardholder has a high risk profile, both of which are detrimental to the health of one’s credit.

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