Credit Limit is a term that refers to the maximum amount of money that people can borrow from their banks using their credit cards. This limit is set by the bank based on factors such as the income of cardholders, credit score, monthly salary, etc. People can use this limit for online and in- store purchases, bill payments, cash withdrawals, etc.
The credit limit is revised periodically by the banks. During the revision process, banks consider various things like monthly card payments, credit score and income of the cardholders. If cardholders have a good record, then banks tend to increase their credit limit. Some people consider a high credit limit to be a bad thing, but it is not. A high credit limit has its own set of benefits.
Mentioned below are some of the benefits of increasing the credit card limit:
By increasing their credit card limit, cardholders can lower their card usage. For example – If a person’s credit limit at present is Rs.1, 00, 000 and he/she has used only Rs.50, 000, then it means that he/she has used half of his/her full credit limit. So, in case he/she chooses to increase his/her credit limit to Rs.1, 25, 000, but continue to use only Rs.50, 000, then he/she will be using less than half of the credit limit. In this way, his/her credit utilization has been reduced. Here, the expenses of the person has not reduced, but he/she will be considered as a responsible user by financial institutions.
WWhen credit cardholders use increase their credit limit but not their expenses, then they end up using less credit than the limit assigned to them. This increases their credit score because there is a decrease in their debts. Financial institutions consider cardholders who use an amount lower than their credit limit as financially secure and responsible because they are spending less than they can. This factor assures the institutions that they will receive their credit card payments on time.
It is better to have one credit card with a high credit limit rather than owning multiple cards with lower limits. Having one card makes it simple for cardholders to keep a track of their card activities. It helps them plan their expenses well. Also, cardholders can save on the extra charges that they would otherwise have had to pay for each of the cards, in case they owned multiple credit cards. Owning one card with a higher limit also increases their chance of having a good credit score. More than one credit card account can have a significant impact on the credit history, if all of them are not managed well.
People with high credit limit are considered safe and reliable by banks, which makes it easy for them to get loans. Their increased credit limit acts as a proof to banks that they can be trusted with money. Also, a higher credit limit can result in a high credit score (as mentioned above) and a high score can help people get loans easily at low rates of interest. So, while negotiating for a loan, credit cardholders can use their high credit limit as a reason to get a good deal.
If credit cardholders have a high credit limit, they can spend more using their credit cards. People who always pay their full credit card bills on time can charge their purchases to their cards to earn more rewards. Also, if their bank has increased their credit limit, it means that their banks consider them important and may offer more reward points and benefits. The rewards can help cardholders in reducing their other spends. For example – Money spent on purchasing airline tickets, gifts, etc.
Credit cardholders can use their cards to make large purchases if they have a high credit limit and earn rewards. Not many cardholders are aware of the fact that credit cards provide consumer protection such as price protection, extended warranty, coverage for lost goods, etc. If cardholders use their cards to make large purchases, they can use their card to protect themselves in case of any trouble.
A high credit limit on credit cards can help cardholders in situations where they are in urgent need funds. If they have a high limit, they do not have to borrow money from another individual or opt for a loan. Also, if they wish to take a loan, their limit will make it easy for them to get loans from their bank at a good interest rate.
Some of the disadvantages of increasing the credit limit are as follows:
An increase in credit card limit provides more spending power to credit cardholders. If cardholders do not control their spending and increase their expenses along with the limit, then their debts will increase. Some cardholders end up spending more than they can afford at times when they have an increased limit, which results in them paying more interest on their credit card bills.
When credit cardholders request for an increase in the credit limit, card issuers conduct a strict enquiry and evaluate their existing credit. Such enquiries can have a negative impact on a cardholder’s credit. If multiple enquiries are made in a short period of time, then it can result in the reduction of credit score.
These are some of the benefits and disadvantages of increasing the credit limit. Credit cardholders should think and weigh all the pros and cons before they increase their credit limit. They should ensure that they plan their budget and control their spending, if they are increasing the limit.