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When it comes to money management, credit cards are a useful tool. They come with a credit limit that controls spending. While using a credit card, it is important to understand how this credit limit is set, ways to increase it, and the variance between the total and available credit limit.
A credit card limit is the maximum amount that a cardholder can borrow or charge on a credit card. It serves as a financial cap, dictating the extent to which one can utilise the credit card for purchases, cash advances, or balance transfers.
Understanding this limit is fundamental to managing one's financial responsibilities and avoiding potential pitfalls associated with excessive borrowing.
The factors that influence the determination of a credit limit on a credit card are as follows:
Understanding the difference between the total credit limit and the available credit limit is essential for responsible credit card management, the differences are as follows:
|
Criteria |
Total Credit Limit |
Available Credit Limit |
|
Definition |
The highest possible borrowing or spending limit is accessible to a credit card holder. |
The remaining amount can be utilised after deducting the current outstanding balance. |
|
Calculation |
Credit limits on cards are determined by the issuer based on credit, income, and financial history. |
Total credit limit minus the current outstanding balance and any pending transactions gives the available credit limit. |
|
Significance |
Represents the maximum allowed spending or borrowing on a credit card. |
Indicates the actual amount available for new purchases, cash advances, or balance transfers. |
|
Implications for Debt |
Does not consider the current balance or how much of the credit limit has already been utilised. |
Reflects the remaining credit after accounting for current spending and outstanding balances. |
|
Monitoring Usage |
Useful for understanding the maximum borrowing and spending capacity. |
Crucial for preventing over-limit fees and managing spending within a budget. |
|
Overspending Risk |
Does not provide real-time information on available funds, and a higher total limit might increase the risk of overspending. |
Helps in avoiding exceeding the credit limit and potential fees associated with over-limit transactions. |
|
Credit Utilisation |
Total Credit limit is not directly linked to credit utilisation ratios but can influence the ratios. |
Directly impacts utilisation ratios, as it considers the relationship between outstanding balances and credit limit. |
The following are the steps to increase your credit limit, get enhanced financial flexibility, and improve your credit utilisation ratio:
In essence, your credit limit is a crucial financial boundary. This article has delved into its determination, the distinction between total and available limits, and its overall importance. Navigating this financial parameter wisely is key, impacting your purchasing ability, credit utilisation, and overall financial health.
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