Credit card limit increase is one of the most debated topics when it comes to credit card maintenance. Credit cardholders are often confused about whether or not they should enhance their credit card’s credit limit.
Once the credit card status is approved, many individuals focus on increasing their credit limit. However, the right answer depends on your purpose of using a credit card. Typically, it is a good idea to increase your credit limit due to the following reasons.
Reduce your Credit Utilization Ratio
Credit utilization ratio (CUR) is the ratio of your spending and your credit limit. For example, if your credit limit is fixed at 20,000 INR and you spend a total of 5,000 INR on your credit card, your CUR will be 25%.
Your CIBIL score takes a hit if your CUR is too high. The reason behind this is the fact that lenders consider you to be at risk of taking on large amounts of debt, making it difficult for you to make timely payments in the future.
Ideally, it is advisable to keep your CUR at 30% or below. If your spending exceeds this figure, increasing your credit limit can be of help as it will lower your CUR. However, you will need to keep your spending constant in order to do the same. Thus, when you opt for credit card limit increase, it will increase your CIBIL score, allowing you to obtain credit more easily in the future.
Increased Purchasing Power
Another reason why you should focus on increasing your credit limit is that it gives you a higher purchasing power. When you want to purchase a high-value gadget such as a laptop, you don’t want to spend all the cash you have on it. With a higher limit credit card, you will be able to pay for your purchase with the card without worrying about securing credit elsewhere. Additionally, you can spend more without negatively affecting your credit score.
Contingency for Emergencies
You can never predict when you might have to incur unexpected expenses. Medical bills, car breakdowns, house repairs and other emergencies can come up when you haven’t planned for them in your budget. A credit card with a high limit can be a saviour in situations like these. In case of a major car repair bill, you can pay with your credit card, get your car running and spread out your payments. Thus, focusing on a credit card limit increase can help you in times when you need a little extra finance.
Easier to Get Loans and Other Credit
When you have a high credit score, you have greater chances of getting approved for home loans, mortgages, car loans, credit cards and other lines of credit. Furthermore, a high credit score also strengthens your chances of getting a lower interest rate on your loans. It is your credit score that determines whether you would be given the best possible interest rate or a higher, risk-adjusted interest rate. This is because borrowers with strong credit scores are considered to be safe and reliable by lenders.
Earn More Rewards
If you are consistent with timely repayments of credit card bills in full, you can put more expenses on your credit card. A high credit limit can allow you to do that, and consequently boost the rewards you earn, such as points, cashbacks or travel miles. Additionally, making payments for recurring expenses on your credit cards will help you earn more rewards. These rewards in turn will help you save money by helping you pay for other things such as clothes, flights, vacations and gifts.
In conclusion, focusing on a credit card limit increase will reduce your credit utilization ratio, enhance your credit score, give you higher purchasing power, allow you to get finance for rainy days, get credit easily and earn more rewards.