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Dubai: Some credit cards are offered to people without a credit history but most often these cards have a much lower credit limit.

However, if you the dues are paid back on time, these cards can be a good way to boost your credit rating by showing creditors that you can be trusted with a larger credit limit.

Meanwhile, those with a credible payment track record have a card with a higher limit. These credit limits can go into the tens of thousands of dirhams, if not more. But how do such limits work?

What is a credit limit? How do such caps work?
A credit limit is the maximum amount you can charge on a credit account, such as a credit card. As you use your card, the amount of each purchase is subtracted from your credit limit.

For example, if a credit card issuer gives you a credit limit of Dh2,500, that's the maximum amount you can have charged to the card at any given time.

If you spend Dh1,900 on your card, you'll then have Dh600 you can spend, without incurring a penalty or not being able to charge any more on the card.

Better to have a higher credit limit or a lower one?

“Regardless of whether you have a low or high credit limit, it's very easy to run up unaffordable debts which will take a long time to pay back,” cautioned Bahrain-based independent credit advisor Samuel D’Costa.

Sometimes your card provider can offer to increase your credit limit, especially if you have a good history of payments. However, that is conditional on whether or not you can be responsible in taking on higher debt and payment it back on time.

“You should think very carefully before agreeing to an increase in your credit limit, and refuse the increase if you don't need it. Some people like a higher limit 'just in case', but there's always the temptation to keep spending and run up a debt you eventually can't afford to pay back,” D’Costa added.

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Credit card issuers determine your credit limit by evaluating a number of factors.

How is it decided how much credit card limit you get?

Credit card issuers determine your credit limit by evaluating a number of factors. “By understanding what they're looking for, you can manage your credit responsibly and increase your odds of getting approved for a higher credit limit,” explained D’Costa.

A creditor’s call to hike your limit could depend on factors like how long your account has been open and whether you've used your credit responsibly. While credit card companies could approach you and inquire the need for a higher limit, you could also request an increase yourself.

Many credit card companies turn to your credit score to help determine your card's limit. This means that factors such as payment history, income, credit utilisation rates, the length of your credit history, credit mix, large expenses and any recent new credit card applications will impact your card limit.

What are ‘credit utilisation rates’ and ‘credit mix’?
Your ‘credit utilisation rate’, sometimes called your ‘credit utilisation ratio’, is the amount of credit you're currently using divided by the total amount of credit you have available. In other words, it is how much you currently owe divided by your credit limit. It is generally expressed as a per cent.

On the other hand, a ‘credit mix’ refers to the types of different credit accounts you have – mortgages, loans, credit cards, etc. A ‘credit mix’ is one of the most prominent factor generally considered when calculating your credit scores.

How much of a credit card limit should you have?

A good rule of thumb is to keep your credit utilisation under 30 per cent. This means that if you have Dh10,000 in available credit, you don't ever want your balances to go over Dh3,000.

“If your balance exceeds the 30 per cent credit utilisation ratio, try to pay it off as soon as possible; otherwise, your credit score may suffer,” D’Costa further noted.

By using no more than 30 per cent of your credit limit, you keep your debt-to-credit ratio strong, experts reiterate. (Debt-to-credit ratio is a percentage of your monthly income that goes toward paying debts.)

“Staying under 10 per cent is even better. However, in a real-life budget, the 30 per cent rule works like this: If you have a card with a Dh1,000 credit limit, it's best not to have more than a Dh300 balance at any time,” said D’Costa.

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If you go over your credit limit, your card could be declined when you try to use it.

What happens if you go over your credit limit?

If you go over your credit limit, a few things could happen. The first is that your card could be declined when you try to use it.

“You could also be charged a fee if you’re part of an over-the-limit coverage program, but that program is optional or conditional on whether or not you opt for it,” D’Costa added.

“If you opt into the program, you could be charged a fee each billing cycle you go above your credit limit. Before you opt in, your credit card company must tell you how much the over-the-limit fees will be.”

If opted for a high credit limit by mistake, you can change your preference at any time. But you could still have to pay any fees that were already charged. And if your balance stays above your limit after you opt out, you may be charged additional fees too.

Bottom line: Keep track of your credit limit

Knowing your credit card’s maximum withdrawal cap does not mean it’s a good idea to reach it. In fact, learning how to manage your limit responsibly now will likely improve how much you can borrow down the road for such things as a home or a car.

A big part of your credit score is determined by how much of your total credit you use – meaning the balances and limits on all of your cards are taken into account to calculate your score. Having a good credit score can affect your ability to get financing on things like a home or car, start a business etc.

It’s always a good idea to keep your credit card balance as low as possible in relation to your credit limit. Of course, paying your balance in full each month is the best practice. If you can’t, paying as much over the minimum as you can is still a step in the right direction.

Charging too much on your credit card can have a number of negative consequences. Credit card lenders may assess overcharge fees, decrease your credit limit or even close your account if you go over your limit habitually.

Lenders may also increase your interest rate if your credit history shows that you regularly exceed your credit limit, and your credit score may be negatively affected. So know your limit—and always keep track of how much you have charged.