Credit card issuers initially sanction lower credit limits on new card applicants. They are offered higher credit limits later, as card issuers are assured of their repayment behavior and revenue growth. However, by accepting such higher credit limit offers, there may be a fear of falling into a debt trap as a result of higher credit card spending.
Take a look at some of the pros and cons of increasing your credit limit.
Improves credit rating
Credit bureaus take your credit utilization rate (CUR) into account when calculating your credit score. This ratio is the proportion of the total credit limit used by a cardholder. Lenders generally view the CUR above the 30% level as a sign of thirst for credit and, therefore, more likely to default. Therefore, credit bureaus should reduce their credit score when exceeding the 30% level for CUR.
“Keeping the CUR within the 30% limit is crucial to improving / building your credit score. For those who frequently violate this level, the most pragmatic way to keep their CUR within the 30% level is to accept or make credit card limit improvement offers from existing card issuers. demand. If your existing credit card issuers refuse to increase your credit card limit, apply for one or more additional credit cards from other card issuers, ”said Sahil Arora, director of Paisabazaar.com.
For example, suppose you usually spend around ??50,000 each month on your credit card has a credit limit of ??1 lakh. The CUR would be 50%. Now, if your issuer increases your credit limit to ??1.7 lakh, your CUR will go down to 29%. Likewise, if you have an additional credit card with a credit limit of ??70,000, you will see a similar effect on your CUR i.e. it will decrease to 29%.
Easy to manage financial deficits
The increased credit limit can serve as a source of emergency funds in the event of financial shortage or due to financial demands resulting from job loss, illness, accident, disability, etc. A higher credit limit will allow you to fill cash shortages by channeling those unforeseen expenses. through your credit card while keeping your cash flow intact.
In addition, those who do not have the ability to pay off their credit card bill by the next due date can convert all or part of their card bill into Monthly Equivalent Installments (EMI). In this way, one can reduce the interest rate on their outstanding balance to some extent without incurring high finance charges of 30-49% per annum.
You can get a higher sanctioned loan
An improved credit limit allows you to avail of a higher loan amount through a loan against a credit card, since these loans are usually sanctioned by the credit limit of the credit card holder. “Credit card loans are pre-approved loans available only to certain credit card holders with good repayment and spending history. They are usually disbursed on the same day as the loan application, which makes them an ideal instrument for dealing with financial demands and deficits, ”said Arora.
High credit limit leading to more debt
While a higher credit card limit can get you spending more, it can also put you in more debt, if not used wisely. “With an increased credit limit, you could end up spending on impulse, more than you can afford to pay. If you are not able to pay your contributions on time, it will drastically affect your credit score and make it difficult to obtain better credit options in the future, ”said Sujay Das, chief risk officer, MoneyTap, a credit company based in Bengaluru. .
In addition, the credit limit can be increased by accepting too many credit cards. So when you take too many credit cards, it increases your dependence on credit cards. This further results in an increase in debt. Hence, it can be very easy to ruin credit which ideally takes a long time to rebuild it. Therefore, treat your increased credit limit responsibly.
Pay more interest
If you don’t pay off your balance in full each month, you’ll end up paying more interest on your overdue amount. So if you’ve increased your credit card credit limit, you may not be able to pay your entire bill. This way you may have to pay more interest to the issuing bank. Therefore, as a user, be mindful of your habits and always try to pay your credit card bill in full every month.
The loss increases if your credit card is misplaced
If your credit card is stolen, the loss will be greater because the credit limit is high. Therefore, act responsibly when using a credit card with a high credit limit.
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