By now you probably have a basic understanding of what a credit card is and what it can do. Yes, it’s a piece of plastic that has the power to give you almost anything you want – well, anything within the card’s credit limit anyway.

But there’s more to credit cards than just the ability to boost your spending power when you really need it. In fact, the better you understand the benefits of using credit cards and how your credit limit is calculated – the better you’ll be able to maximise the effectiveness of your cards.

What Are the Benefits of Using Credit Cards?

Credit cards are as useful as they are dangerous. Of course, how useful they are depends on how wisely and responsibly you use them!

It’s true that the greatest benefit to having a credit card is convenience – it’s incredibly easy to use and carry. That means you don’t need to carry around a fat wallet loaded with cash and coins. Also, when you have expenses to pay and not enough cash to pay them, credit cards can let you “borrow” the cash you need.

But there are plenty of other useful benefits to having a credit card that simply convenience.

Here are some of the many benefits to using credit cards:

• You Can Stay On Top of Your Finances: Nowadays, credit card companies make it easier for you to track your spending and dispute fishy charges with online access. Also, many (Financial Institutions) FIs and banks enable you to set reminders via email or SMS so you can avoid expensive interest and late payment fees!

• You Can Build Your Credit History: Credit cards can help you build you build a positive (or negative) credit history, which can help you help you down the road with lenders when it comes to making big-money purchases like property or a car. Of course, you need to make sure you make payments on time and carry a low or no balance to build a good credit history!

• You Can Get Rewards and Discounts: Credit cards often come with a variety of rewards such as points and frequent flyer programmes that allow you to get free stuff once you accumulate enough points. Many credit cards also come with cash back and discounts that save you money on petrol, groceries and even everyday purchases.

• You Can Travel with Peace of Mind: Credit cards eliminate the need to carry around large amounts of cash but you can also get free travel insurance too, depending on your credit card. Also, if you happen to become the victim of a robbery, you can lose your cash, but with a credit card all you have to do is cancel the card, file a police report and dispute any charges. That’s it!

What is a Credit Limit and how is it Calculated?

 FIs and banks won’t just give you an unlimited spending limit when issuing you a credit card. Well, there are cards that have “unlimited” spending limits for high-net-worth individuals with plenty of zeroes in your bank account(s).

But for the average person, the FIs and banks use your annual income to factor how much your credit limit will be.

Here’s a chart showing how FIs and banks generally set your credit limit:

Keep in mind that the credit limit numbers above are meant to be a general illustration of how FIs and banks determine your credit limit. Different credit card issuers will have different ways of assessing how much you can borrow.

Also, keep not that if you have credit card with 4 or more FIs or banks, you might only get 1.5 X your monthly income unless you already have a savings account with them. This typically meant to be a precautionary step to discourage you from using too much credit.