How credit limit is set on your credit card?
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It’s always an interesting point to note that the spending limit of credit cards vary from each other. However, we don’t normally give a thought as to how it is done. Knowing the same can help you maintain good credit history as well as get the limit revised after a certain period to ensure you do mores spending via your credit card. The spending limit or call credit limit is dependent upon the income and usage of the borrower. Credit card issuance companies source information regarding you before setting the credit limit on it. The companies source the information through income documents submitted by you, like salary slip and income tax return, as well as check your association with a brand, merchant establishment, etc. Let’s find how they investigate such details in the below mentioned points.
Investigation through income documents
The credit card companies typically use a multiplier with your gross monthly income while sourcing is done via income tax documents. The multiplier can range upto 2.5-3 times the gross salary based on the risk appetite of an individual and the credit policy of the credit card company. But the limit is not dependent on gross monthly income alone as credit report and the loans you have, if any, are also critical in deciding the same. Generally, the credit card provider comes out with your fixed monthly obligations such as Equated Monthly Installments (EMIs) of home loan/personal loan/car loan, and deduct the amount from the monthly salary.
For instance-If your in hand salary is Rs 60,000 per month out of which you spend about 25%-30% on your basic needs, then the card provider will check where the remaining amount that will be spent such as EMIs.
The card company also takes into consideration the debt-burden ratio, which arrives after dividing EMIs by the gross monthly salary. The credit card limit can thus be set a proportion of the debt burden ratio.
Non-income based investigation
Here, credit limit gets set based on the billed value. If you are shopping regularly at a certain merchant establishment, a member of a premium club or flying frequently with a particular airline, you will then receive co-branded credit cards to make spending across these points. The value of your spending will ascertain your credit limit. Based on your spending trends and actual amount, the card issuer will use a multiplier to arrive at your income and set your credit limit accordingly.
Credit Card Limit Revision
Credit limit can be revised after a period of say 6-18 months based on the bank’s credit policy. Depending upon how you have paid the loans and your overall credit report, the credit limit can be revised. If the report comes fine, then the credit card limit can go up by 1.25-1.5 times of your current credit limit. But if you default or on the verge of doing the same during the investigation of card companies, then the credit limit can go down.