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Every credit card comes with a certain credit limit which is also its most important component. The credit limit on any card dictates the amount of funds that a user can borrow. Credit limits often vary across credit card users and are dependent on one’s credit score. The better the credit score, the higher the credit limit.
What are the advantages offered by a higher credit limit?
A higher limit comes with multiple benefits. With a higher limit, one can enjoy more flexibility with regard to larger purchases and also have sufficient money available for any emergency situations. A lesser-known advantage is the extent to which a higher credit limit benefits one’s credit score. Similarly, a raise in credit limit can provide a credit card user some peace of mind since one can be assured that his/her financial situation is in good state.
Having a high limit on your credit card can help in pulling you out of an unexpected expense situation.
- More purchasing power
While it may sound obvious that a higher credit limit comes with a higher ability to make large purchases through your credit card, it is one of the primary benefits. Imagine you want to buy the latest gadget like a premium smartphone. You may not want to spend all your available cash on such a purchase. Although store financing is an option, it is just another form of credit that will show up on your credit report. With a higher credit limit on your credit card, however, you can purchase the card and need not worry about availing any fresh form of credit.
- Funds for emergency needs
Life can be very unpredictable. Whether it is damage to the house, large medical bills or an unexpected expense due to gifting, you may end up spending well beyond your budget. With a credit card that has a high credit limit, you may not have to face hurdles during such emergencies. If you need to spend towards hospitalisation, a low credit limit card may not come to your rescue. But, with a high credit limit, you can easily cater to your health needs and repay the same over a period.
- Higher credit score
One of the major components of your credit is the debt to credit ratio. Thus, if you need to pay Rs. 3,000 on a card that has a Rs. 3,500 credit limit, you will have to be prepared for a drop in your credit rating despite a near-perfect repayment history. However, if you avail of a credit limit increase to Rs. 7,500, the debt to credit ratio comes down and that improves your credit score. A higher credit limit is directly related to a better credit score.
- Financial safety
Another advantage of getting a higher credit limit is the feel-good factor. It reflects that I have been able to manage your credit obligations well. This makes you appear in the good books of lenders. It also acts as an indication of being on the right track financially.
Why can a higher credit limit be bad?
Raising your credit limit does have certain disadvantages since money does not always buy happiness. A higher credit limit offers an opportunity to raise your debt but this could signal a higher risk of repayment and additional interest burden. Let’s have a look at some of the flaws of a higher credit limit:
- Additional debt
With a higher credit limit, you can spend more money. This means that as your credit limit rises and maxes out, your credit utilisation ratio can rise too. This will be considered as a bad signal from the creditors perspective. Another potential problem is if you want to do a credit card balance transfer, you may not be given a higher credit limit on the new card since there is already a higher credit limit on the existing card.
- Higher interest
Only if you pay your credit card dues in full every month you can do away with the interest component. Failure to do so will mean additional interest costs every month. With a credit limit increase, the chances of delayed or non-payment are higher. This means more interest is being paid to the issuing bank.
- False sense of security
This is especially true if you don't regularly monitor your financial habits. With a credit limit increase, you may be convinced about an improved credit score more than it may be required to be. This increases the chances of you applying for new credit and results in more inquiries added to your credit report.
Conclusion
Your credit limit is not just based on your credit score, although many banks may raise credit limit as a reward to customers with a good repayment history. While raising your credit limit has some benefits, make sure you are aware of all the information surrounding it. It is important to know whether you can financially handle it. Always remember that credit card debt can never be a good thing. Consider your credit limit increase as your responsibility, else it can easily ruin the benefits of credit.
FAQs
- How do I check if I am eligible for a pre-approved credit limit increase offer?
Most eligible customers are informed about pre-approved credit limit increases via SMS. One can also check eligibility for the same via net banking or customer care of the bank.
- What is the cash limit?
Cash limit is the amount assigned to one’s credit card account, usually included within the credit limit, which can be withdrawn in the form of cash.
- How much of the credit limit can I use?
You can make purchases using the entire credit limit, however, it is not possible to go beyond the credit limit. Especially if you haven’t chosen the option to have an over-limit on the card. Make sure to maintain a lower credit utilisation ratio for a good credit score.
- How much will my credit limit be?
The credit card issuers determine every card’s credit limit at the time of issuing the card. To determine the credit limit, issuers assess the applicant’s income, debt level, credit history, among other factors.
- What happens if I exceed my credit limit?
In case you exceed the credit limit, you may either be charged an over-limit fee or the transaction could be declined.
- Why was my credit limit increase request denied?
Your credit limit increase request may have been denied due to reasons like low income, lower credit card utilisation or default on repayments.
- Is it good to increase the credit card limit in India?
There are both benefits and disadvantages of increasing the credit card limit. One has to plan the credit usage before opting for a limit increase.