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Arriving at Credit Limits

Information about your income and spending pattern determines your credit card limit.
Dipak Mondal/Money Today | Print Edition: April 2013

Have you ever wondered why spending limits on your credit cards vary so much? The spending limit or the credit limit is a function of the borrower's income and usage. The crucial factor that determines it, though, is sourcing of information about you by credit card companies.

The companies do the sourcing in two ways--through income documents that you submit, such as the salary slip and the income tax return, and surrogate methods such as your association with a brand, a merchant outlet or a premium club.

SOURCING THROUGH INCOME DOCUMENTS

When sourcing is done through income or tax documents, the card issuer usually uses a multiplier with the gross monthly income. That multiplier can be 2.5/3 times the gross salary depending upon the person's risk appetite and the credit policy of the bank or the credit card company.

However, the limit is not based on just the gross monthly salary. It can be tempered by your credit bureau report and the number of loans you are servicing. The card company usually figures out your fixed monthly obligations such as home/personal loan equated monthly instalments, or EMIs, and deduct the amount from the monthly salary.

For instance, if a person is getting Rs 1 lakh salary in hand, of which 20-30 per cent is spent on basic monthly needs, the card company will check how much of the remaining amount is spent on other monthly obligations such as EMIs.

It will also take into account the debt-burden ratio, which is total of all EMIs divided by the monthly gross salary. The credit card limit can be a proportion of the debt-burden ratio.

NON-INCOME BASED SOURCING

In this case, the credit limit is fixed on the basis of the 'billed value'. If you are a frequent shopper at a particular merchant outlet, a frequent flier with an airlines or a member of a premium club, you will be offered credit cards, mostly co-branded, against these spendings.

In such a case, the value of your annual spending will determine the limit.

If you are being offered a co-branded card of a merchant outlet, it means the issuer has taken account of your spending trends. If you are spending Rs 1 lakh annually at a merchant outlet, the issuer will use a multiplier to arrive at your income and accordingly set the borrowing limit.

However, as with the income sourcing method, banks and credit card companies will use the credit bureau report to check if the credit limit offered is within the borrower's repayment capacity.

Can the credit limits differ if the documents are different? Yes, if the information is sourced from different documents.

"When an agent approaches you for a credit card while you are standing in the queue of a merchant outlet, he will not ask for your income documents. The credit limit in such a case will be based on your spending pattern," says Sanjay Patel, managing director and CEO, Equifax Credit Information Services.

TIME FACTOR

Time can be another deciding factor. If you had been issued a card in, say, 2006 or 2007, it is possible that your credit limit is higher than for the card that you have been issued recently.

"This could be because during these years the credit policy of the bank might have changed due to the financial crisis in 2008-09 that hit many banks and financial institutions, forcing them to be more cautious with credit disbursals," says Sanjay Patel of Equifax.

CREDIT LIMIT REVISION

It's subjective. Most banks make you eligible for this after 6-18 months, depending upon their credit policy.

They take a two-way view-how you have behaved on their own books, that is, if you have paid loans on time, and your overall credit report.

Based on these assessments, they will decide on increasing your credit limit, which can be a minimum of 1.25-1.5 times your existing credit limit. The companies keep assessing the increase in revenue to the rise in risk due to the upward revision of the limit.

Can it be revised downwards? Yes, if your risk performance is hinting at possible default. Card issuers assess your repayment patterns at regular intervals and may revise down the credit limit if they find any sign of a possible default. You can yourself ask the bank to reduce the credit limit if you think it is high and may lead to overspending.

So, the next time you are offered a credit card with lower credit limit than on the existing one, it is likely that sourcing of information has been different, or banks have become more cautious with credit disbursal.

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