Credit Card: A Priority: Should You Increase Your Credit Card Credit Limit?
Devendra Kumar spends almost Rs 40,000 on his credit card each month. Although he also pays the entire bill on time, the high credit usage of almost 80% (his credit card limit is Rs 50,000) is a wake-up call to lenders. This implies that he risks exceeding the limit of his card and that he could have difficulty repaying the amount owed. Credit bureaus take the credit utilization rate into account when calculating an individual’s credit score. A high credit utilization rate means a lower score. âA 20% to 30% credit utilization rate is preferable. In case the ratio is higher, the applicant is seen as greedy for credit, âexplains Naveen Kukreja, Managing Director of Paisabazaar.com. âIt is possible that banks charge higher interest on loans to these people because they are seen as risky customers,â adds Aditya Agarwal, founder of Wealthy .in. Now, if Kumar’s card credit limit was increased, his credit utilization rate would decrease. For example, if the credit limit was Rs 1.5 lakh instead of Rs 50,000, Kumar’s credit utilization rate to spend Rs 40,000 per month would be 27%. Most banks revise the credit limit from time to time based on the user’s repayment history, transactions, outstanding loans, and increased income. A cardholder can also ask the issuing bank for an increase in their credit limit. There is usually no additional cost involved, although an increase by upgrading the card may incur a fee.
Better credit score
A lower credit utilization rate improves the cardholder’s credit rating, making them a less risky customer in the eyes of the lender. A higher credit limit can also be used as a negotiating tool to secure a larger loan from the issuing bank.
Useful in an emergency
A credit card with a large limit comes in handy in an emergency such as a sudden hospitalization where large payments need to be made up front.
More purchasing power
A card with a higher limit makes large purchases, such as white goods for the home, easy to make.
Encourages reckless spending This is a bad idea for compulsive shoppers who can easily derail their budgets by buying recklessly with their credit cards. This again has a negative impact on the credit score.
If the security of the card is compromised, the damage can be high. To mitigate the risk of fraud, users should set up alerts by which the bank notifies them when a transaction that does not match their usual spending habits is noticed.
High interest exit
As increasing the credit limit can also mean larger expenses, the chances that the cardholder will not be able to repay the amount in full within a month also increases. This results in high interest expense.
Another way to increase your credit limit is to buy multiple credit cards. However, there are also pitfalls here. Adhil Shetty of Bankbazar.com says, âYou will spend more and there is a high chance of default if you cannot manage the payments and the credit period well. This will have a negative impact on your credit score. Shetty says that a single credit card with a higher limit is a better solution. You’ll also save on the annual fees for multiple cards.