What is a credit limit?
A credit card is a perfect tool that can be used to buy products and services. The good thing about credit cards is that you can pay back the lending institution on a monthly EMI basis. Credit cards offer multiple cashback and reward offers; that’s what makes a credit card purchase more rewarding. However, a credit card comes with a predetermined limit, and as a borrower, you are not allowed to use your card beyond that limit.
In some cases, banks and financial institutions allow specific customers to spend beyond their credit limit. This over limit allowed by the lender is subject to some terms and conditions. In this article, we will have a look at what a credit card overdraft limit is.
A credit limit is the maximum amount a customer can spend on a particular credit card. This limit is set by the card issuer. There are some factors that determine what the credit limit should be, and they change for every individual. The limit is set based on monthly income, credit score, previous credit repayment history, etc. Banks also periodically revise the credit limit for a given customer. It also allows premium customers to revise their credit card limit.
What is the credit card overdraft limit?
The overdraft limit is the amount you can spend on your credit card that is greater than the standard credit limit. It varies depending on the credit profile of the borrower. Suppose you have a credit profile of Rs. 1 lakh and have used it up. The bank may allow you an additional credit limit of Rs.50,000 depending on your credit profile.
This is a special case privilege, and as a borrower, you should not overuse this power as the bank might revoke the privilege against your card. Getting an overdraft limit is useful when you have exhausted your given limit but need more money to take care of your needs. When you have the overdraft facility, you don’t have to apply for a new card and fulfill your requirement with a single credit card.
Eligibility for the overdraft limit
As we have mentioned above, the credit card overdraft facility is not extended to every borrower, and there are some requirements if you are looking for a credit card overdraft limit. You should be regular when it comes to credit card payments, a substantial income, and a good credit score.
You may or may not get an overdraft facility on your credit card. But it is always good to know what the dangers of overusing your credit card are:
- Once you reach your credit limit, all your transactions will be declined. This will bar you from using the credit card anymore to pay bills or shop.
- If you don’t have an overdraft facility and still want to complete the credit card transaction after reaching the credit card limit, the bank will charge you an overdraft limit fee.
- If you go over your credit limit, the bank may raise the interest rate on your credit card. So all your future credit card repayments will become more expensive.
- Your credit score will take a serious beating. Exceeding your credit limit creates a negative impact and reflects on your credit report. A bad credit score will impact your future loan and credit card applications.
- Frequent credit limit overuse may lead to the deactivation of your credit card.
The takeaway
As a credit card holder, you must always try to stay within your credit card limit. Overusing your credit limit is harmful when it comes to future credit requirements. And if you need to go beyond the credit limit, you can always raise a request with your bank.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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