Credit Card News: Is your credit limit higher than your salary? Find out why banks do this..

Whether it is for movie tickets, online shopping, or making purchases on EMI, everyone uses credit cards these days. But have you ever wondered why people are relying so heavily on credit? Do you know why banks deliberately offer credit limits that exceed a person's salary? And do you know how much you should actually spend, even if you have a high credit limit? If not, then this article is for you.

The craze for credit cards is growing rapidly among the youth. Features like cashback, attractive offers, and free lounge access draw young people towards them. Given this, it is crucial to understand how to use a credit card properly and what pitfalls to avoid.

Why do banks offer high credit limits?
We often see banks granting credit limits that are higher than a customer's salary. But have you ever wondered how a bank might offer a limit of ₹70,000 to someone earning ₹50,000? In reality, banks consider not just the salary, but also the customer's credit score, payment history, and overall financial standing. However, there is another factor driving this: the bank's own profit, which comes from interest and merchant commissions.

Credit card companies benefit from offering higher limits. If you use the limit and pay the full bill on time, the bank earns a commission from the merchants. If you are unable to pay the full bill, the bank profits from hefty interest charges and late fees.

How much should you spend?
If you use a credit card, you should limit your spending to about 30% of your take-home salary to ensure you don't face difficulties when the bill is due. For instance, if your take-home salary is ₹60,000, ideally, you should not spend more than ₹18,000 using your credit card. Experts advise against exceeding this 30% threshold, as doing so can harm your credit score and make it difficult to settle your bills.

Is paying the 'minimum due' the right approach? The straightforward answer to this question is no. Paying only the minimum due amount is never a good idea. While this benefits the bank, it traps the customer in a cycle of accumulating interest. Therefore, you should pay the total amount due every month. Paying only the minimum due allows the bank to charge late fees and interest, making it increasingly difficult to manage payments in subsequent months.

Is it a good idea to hold multiple cards?
Nowadays, people prefer having separate credit cards for different purposes—such as one for fuel and another for online shopping. However, if you do hold multiple cards, you must manage and track them effectively. Be sure to use auto-pay or set reminders to ensure timely payments. Additionally, avoid using your credit card for every single transaction.

Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.