5 Reasons to Opt for a Higher Credit Card Limit
Credit card issuers offer cardholders increased credit limits on their existing cards for regular spending and repayments and/or steadily increasing income. However, many cardholders are afraid to accept such an offer for fear of falling into the debt trap. However, increasing the credit limit can bring several benefits to those who manage their finances well and pay their bills on time. Let’s take a close look at some of the benefits:
1. Higher credit score
Credit bureaus take credit utilization into account when calculating credit scores. This ratio indicates the proportion of your total credit limit used by you. Lenders consider those with a 30-40% credit utilization rate, and since credit-hungry people are more likely to default, the credit bureaus reduce the credit score if they exceed these limits.
If you’re consistently going over 30-40% of your credit limit, the easiest way to lower your credit utilization rate is to request a credit limit increase from your existing card issuer. For example, suppose you spent Rs 30,000 with your credit cards in a month out of the total credit limit of Rs 75,000. Your credit utilization rate for that month would be 40%. Now, if your existing credit card issuers increase your credit limit to Rs 1 lakh and your card spend stays the same, your credit utilization rate for that month will drop to 30%. The credit bureaus will take note of your reduced credit utilization rate and raise your credit score accordingly.
2. Higher reward points and other card benefits
Credit card issuers offer attractive discounts, cash back offers and even higher reward points on card spending at select merchants. Such offers can reduce your overall transaction costs by a significant margin. A higher credit limit will allow you to make higher amount credit card transactions and save more through rebates, cash back and reward points. All this without hurting your credit score.
3. Increased ability to make large card spends
Many credit cards today waive membership and/or annual fees or offer free vouchers/plane tickets for spending above a certain predetermined threshold. Additionally, you can also earn additional reward points on higher spend. So a higher credit limit will not only increase your overall ability to make credit card transactions, but will also allow you to route your large credit card expenses and reach those thresholds faster. Those with a good credit card repayment history can also convert their large expenses and even their entire credit card balance into EMI at attractive rates.
4. Higher Loan Amount on Loan vs. Credit Card
Most credit card issuers offer a pre-approved “credit card loan” to those with a good repayment history. These loans are similar to personal loans as they do not come with any end use restrictions. Their interest rates and loan terms are also generally similar to personal loans. Being pre-approved loans, they are usually disbursed the same day of application, while personal loans can take 2-7 days to disburse.
Since the loan amount in “credit card loans” can never exceed your credit limit on that card, a higher credit limit would allow you to qualify for a larger loan amount. Additionally, a credit card loan would also reduce your available credit limit on that card by the amount of the loan used. So a higher credit limit on this card could leave you with a reserve limit for future use of the credit card.
5. Better prepared to meet financial demands
An increased credit card limit can be a big help in dealing with financial crises. A higher credit limit would allow you to transact with your credit card or qualify for pre-approved loans on the credit card, if you qualify.
(By Sahil Arora, Vice President and Business Leader, Payment Products, Paisabazaar.com)