How Credit Limits Are Determined by Card Issuers

What is a Credit Limit and Why It Matters

Your credit card limit is the maximum amount you can spend using your credit card. Think of it as a financial boundary set by the card issuer based on how much they trust you to repay. This trust isn’t built overnight—it’s determined through careful analysis of several factors.

The way credit limits are determined impacts your purchasing power and financial flexibility. A higher limit allows you to make larger purchases and handle emergencies more easily. It also affects your credit utilisation ratio—the percentage of available credit you’re using—which significantly impacts your credit score.

Key Factors Affecting Credit Card Limits

Credit card limits are set based on multiple factors like income, credit score, and repayment history to assess your borrowing capacity.

Income and Employment Stability

Your income is perhaps the most significant factor in credit card limit calculation. Most issuers follow a simple formula:

Basic Credit Limit = Monthly Income × (2 to 3)

For instance, if you earn ₹50,000 monthly, your initial credit limit might range between ₹1 lakh and ₹1.5 lakhs. However, this multiplier can vary based on other factors.

Employment stability also plays a crucial role. Consider Rahul and Priya, both earning ₹60,000 monthly. Rahul, who has been with a government organisation for five years, received a ₹1.8 lakh limit. Priya, who changed three jobs in two years despite the same income, was offered only ₹1.2 lakhs.

Credit Score and History

Your credit score is a numerical representation of your creditworthiness. The factors affecting credit card limits significantly include:

• Payment history (35% of score weight)
• Credit utilisation ratio (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit applications (10%)

Existing Debt Burden and EMIs

How credit limits are determined also depends on your current debt obligations. Lenders calculate your debt-to-income (DTI) ratio to ensure you’re not overextended.

DTI Ratio = (Total Monthly Debt Payments ÷ Monthly Income) × 100

Let’s look at how this works:

1. Meera earns ₹60,000 monthly with no loans. Her DTI is 0%, making her eligible for a ₹1.8 lakhs limit.
2. Vikram earns the same but pays ₹30,000 in home loan EMIs. His DTI is 50%, resulting in a lower ₹90,000 limit.

Most lenders prefer your total EMIs (including the potential credit card payment) to remain below 50-60% of your income.

Credit Utilisation Pattern

How you use existing credit significantly affects future credit card limit calculation. Banks prefer customers who:

1. Use their cards regularly but responsibly.
2. Maintain utilisation below 30% consistently.
3. Pay bills in full rather than minimum amounts.
4. Avoid cash advances and risky spending patterns.

How Banks Review and Adjust Your Credit Limit

Banks, including financial service providers like Airtel Finance, regularly review your credit limit by analysing spending habits, income changes, credit score, and repayment history to adjust your borrowing capacity accordingly.

Initial Limit Setting Process

When you first apply for a card, the issuer follows these steps to determine your initial limit:

1. Basic eligibility screening: Verifying age, income, and residency.
2. Credit bureau check: Pulling your CIBIL and other bureau scores.
3. Income verification: Analysing salary slips and tax returns.
4. Existing relationship assessment: Checking your history with the bank.
5. Risk scoring: Running proprietary algorithms to assess default risk.

Automatic Limit Increases

Factors affecting credit card limits also include your behaviour after receiving the card. Most banks review accounts periodically (typically every 6-12 months) for potential limit increases based on:

• Consistent on-time payments
• Regular card usage
• Maintaining low utilisation
• Increasing income
• Improving credit score

Requesting Limit Increases

You can proactively request higher limits when you need them. The success rate improves if you:

• Wait at least 6 months after card issuance.
• Demonstrate perfect payment history.
• Show increased income (if applicable).
• Time your request after significant spending months.
• Explain a legitimate reason for needing the increase.

RBI Guidelines and Regulatory Framework

While the RBI doesn’t set specific credit limits, it provides guidelines that banks must follow:

• Banks must assess repayment capacity before setting limits.
• Credit limit must be proportionate to income and existing debt.
• Banks must clearly communicate credit limits to customers.
• Limit increases require proper documentation and assessment.
• Banks can reduce limits without prior notice if risk increases.

These regulations ensure responsible lending practices and protect consumers from taking on excessive debt.

In a nutshell

The process of how credit limits are determined involves a complex interplay of your income, credit history, existing debts, and spending patterns. Credit card companies use sophisticated algorithms to calculate your limit based on these factors, aiming to offer you sufficient spending power while managing their risk.

Many credit card issuers in India now use the Airtel Thanks App and similar platforms to streamline this process, making credit limit decisions faster and more accurate through digital verification.

FAQs

1. How do factors affecting credit card limits change for self-employed individuals?

Self-employed applicants are typically assessed based on business turnover and profit rather than salary. Banks may require 2-3 years of income tax returns and often apply stricter credit score requirements.

2. Can having multiple credit cards affect how credit limits are determined on new applications?

Yes. Multiple cards can indicate higher risk to issuers, potentially lowering new credit limits. However, if all cards show excellent payment history, it might demonstrate responsible credit management.

3. How does the credit card limit calculation differ for secured credit cards?

Secured cards have limits based primarily on the security deposit amount rather than income. Typically, your limit equals 80-100% of your deposit, regardless of other factors.

4. Why might two people with identical incomes receive different credit limits?

Credit card limit calculation considers multiple factors beyond income, including credit history length, payment behaviour, existing debt, employment stability, and relationship with the issuer.

5. How quickly can I expect my credit limit to increase if I maintain a perfect payment history?

Most banks review accounts for automatic increases every 6-12 months. With perfect payment history and regular usage, you might see your first increase within 6-9 months of card issuance.