Credit Card: Is A Higher Credit Limit Right For You?
A higher credit limit can help you build a better credit history. Take the case of Devendra Kumar. Kumar spends almost Rs 40,000 on his credit card every month. Although he pays the entire bill on time, his high credit usage of almost 80% (the credit card limit is Rs 50,000) is a wake-up call to lenders. This implies that he risks exhausting the limit of his card and could have difficulty repaying his contribution.
Credit bureaus take the credit utilization rate into account when calculating an individual’s credit score, which is then used by banks to determine loan eligibility. “When calculating the overall score, a 20% weight is given to credit usage and recent consumer credit behavior,” says Harshala Chandorkar, COO, CIBIL. A high credit utilization rate means a lower score.
Now, if Kumar sees his credit limit increase, subject to the terms of the credit card issuer, his credit utilization rate will decrease. For example, if the credit limit is increased to Rs 1.5 lakh, its rate of use of credit to spend Rs 40,000 per month will drop to 27%. “A 20% to 30% credit utilization rate is preferable. If the ratio is higher, the applicant is considered greedy for credit, ”says Naveen Kukreja, Managing Director of Paisabazaar.com. Banks may charge higher interest on loans given to people with a low credit rating (high credit utilization). “They are seen as risky clients,” says Aditya Agarwal, founder of Wealthy.in.
Most banks revise users’ credit card limit from time to time based on their 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. Another way to increase your credit limit is to buy multiple credit cards. However, having multiple cards is not the best way to get a higher credit limit, especially if you are a shopaholic you could end up lowering your credit score. A single credit card with a higher limit is the best solution, says Adhil Shetty of Bankbazar.com. You’ll also save on the annual fees for multiple cards.