Does a credit limit increase affect your score?

A credit limit is the maximum amount of money that you can borrow from banks using credit cards.

The credit limit is revised mostly during the revision process. If you have a good credit track record, then you may be offered a credit limit increase. There is a common misconception that an increase in credit limit will affect credit scores negatively. However, the fact is that it has both, advantages and disadvantages. Here is a list of both.

List of Advantages

• Improved credit score - A higher credit limit can result in a lower credit utilisation ratio. It also becomes a bargaining tool for getting a bigger loan. A lower credit utilisation ratio improves credit score and therefore, better chances of easy credit availability in the future.
• Helpful in emergencies - A higher credit limit can prove helpful during emergencies such as sudden hospitalisation which requires large payments to be made upfront.
• More purchasing power - A credit card with a higher credit limit allows big-ticket purchases, like white goods, expenses related to annual vacations, etc.

List of Disadvantages

• Results in reckless spending - Compulsive shoppers can easily go off-budget by recklessly spending with the higher credit limit. This can have a negative impact on the credit score.
• Security risk – In case the safety of the card is compromised, the monetary damages can be significant. To avoid the risk of fraud, users must try and set up alerts that can inform the bank whenever a transaction does not match their normal spending pattern.
• High-interest expenses - Since an increased credit limit means greater spending, there are higher chances of the cardholder not repaying the amount every month. This results in high-interest expenses.