Imagine a situation wherein Nick Young (yes, the Crazy Rich Asian) and you have the same credit card. It goes without saying that Nick Young probably can spend quite a bit more with his credit card than you can. In other words, the credit limit on his card is higher than yours.
What does a credit limit mean?
In simple terms, the credit ceiling or the credit limit is the maximum amount you can spend using a single credit card.
This begs the question, why do two cardholders with the same credit card have different credit limits? Well, this is due to the factors that determine your credit limit.
Here is a list of factors to help you better understand how your credit limit is determined
1. Your monthly income
While your annual income plays an important role in deciding if you are eligible for a particular credit card, it is your monthly income that determines your credit limit.
In general, your credit limit is 4 times your monthly income.
This is a combined limit which means that it applies to all credit cards and any other unsecured credit facility (personal loans, balance transfers, credit lines, and the like) you may have with the bank.
So, if you have two credit cards and one personal loan with a bank and your monthly income is S$5,000, your credit limit of S$20,000 is divided among these credit facilities as per the bank’s discretion.
This table indicates your credit limit based on your annual salary:
|Annual Income||Credit Limit|
|S$30,000 +||4x monthly income|
|S$15,000 to less than S$30,000 (55 years and above)||2x monthly income|
|S$30,000 + (55 years and above)||4x monthly income|
|S$120,000 +||At the card issuer’s discretion|
|Net personal assets greater than S$2 million|
|Does not meet the minimum income requirement||May be eligible for credit cards with credit limit of S$500|
2. Your credit score
Whether you like it or not, your credit score is also considered while determining your credit limit. A good credit score makes it more likely that a bank will be willing to give you the maximum credit limit available.
A poor credit score, on the other hand, could mean a lower credit limit and in extreme cases, it could also result in your credit card application being denied.
3. Your credit payment history
A poor credit score usually results from a faulty payment history. So, if you haven’t made payments on time or have defaulted on payments in the past, it is a very real possibility that you may have a lower credit limit.
4. The credit limit on other credit cards
Taking their cue from other card issuers, banks tend to provide credit limits that match or are close to the credit limit you already have. This means, if you generally have cards with credit limits of S$3,000 or S$5,000, unless your monthly income increases by a large amount, you are unlikely to get a card with a credit limit of S$20,000.
Debt-to-income-ratio is a framework which compares the debt you currently have to your monthly income. A high ratio typically means that you may not be able to comfortably make payments. As a result, if a bank approves your credit card application, they will ensure that you have a lower limit on your card.
To put it simply, the ratio actually determines if you can afford the credit facility you are applying for. As a result, banks take this ratio into consideration while determining your credit limit.
Ultimately, your credit limit decides your spending potential. And while it is next to impossible to know exactly what your credit limit will be, it is always good to know the factors that determine it. So, the next time you’re wondering why your credit limit differs from that of a friend (or the fictional Nick Young), keep these factors in mind!
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