Moneycontrol
Last Updated : Nov 06, 2015 11:48 AM IST | Source: Moneycontrol.com

5 benefits of increasing credit limit on your credit card

Higher credit limit implies more access to credit. It also helps to improve your credit score.

Adhil Shetty
Bankbazaar.com

Often, card holders equate the credit limit of their credit cards to a symbol of affluence and status. It is considered a privilege to splurge on the card until the limit is exhausted. However, a higher credit limit has several real world benefits.

What is a credit limit?

Credit limit, as the name suggests, is the maximum amount of money you can borrow from the bank using your credit card. You can utilize the credit limit either to fund your purchase, or to withdraw cash depending on your overall cash limit set by the bank. Banks have the right to revise your credit limit from time to time depending on your payment track record, your credit score, and other parameters such as income, transactions.

How do banks fix credit limit?

Banks use several parameters to decide the final credit limit for each credit card applicant. These include the gross monthly salary, the credit score and income among others. After scrutinizing all these, banks decide the credit limit based on their credit policy.

If a bank offers you a credit card with a low credit limit, do not fret, as banks usually revise the credit limit of their clients after 6-18 months depending on their financials and repayment track record. So, if you have been paying your bills on time and improving your overall financial health, your bank is likely to reward you with an extended credit limit sooner rather than later.

Is increase in credit limit good or bad?

An increase in credit limit can be good or bad depending on how you utilize the increased limit.

Benefits of a higher credit limit

1. Lower credit utilization and higher credit score: One huge advantage of having higher credit card limit is the fact that it can lower your credit utilization ratio if used judiciously. Lower credit utilization can help you improve your credit score.

For example, assume you have a credit card with a limit of Rs. 50,000 and you utilize around Rs. 25,000 each month on average. This means you are utilizing half the available credit. So, your credit utilization ratio is 50%. Now, if your bank increases your credit limit to Rs. 75,000 and you keep your spending constant at Rs. 25,000, then your credit utilization ratio reduces to 33.33%. This means you are spending way less than the credit access you have, which implies you are financially secure and less likely to default. All these augur well for your credit score.

2. Possibility of higher loans: If you seek a retail loan with the same bank or any other bank, you can use your higher credit limit to negotiate for a better package. Banks are very careful about offering higher credit limits to card owners; therefore, a high credit limit implies that the bank considers you a safe asset. You can use this as an advantage and seek a higher quantum of loan from your bank.

3. No need for multiple credit cards: Having a single credit card with a high credit limit is always better than having multiple credit cards with lower credit limits. You will need to track only one card and utilize it as per your needs. This way, you are less likely to miss your payment deadlines. Needless to mention, you save on extra charges like annual fees for the other cards.

4. Helpful in financial emergencies: When faced with a financial emergency, a credit card with a high credit limit can come to your rescue. Instead of borrowing money from family or friends or opting for a loan, your credit card can come in handy. You can also get higher personal loans if you have a higher credit limit.

5. Higher rewards: The higher the credit limit of your card, the more desirable a cardholder you are for the bank. Banks reward their premium cardholders with extra reward points and added benefits. So, with a higher credit limit, expect more reward points coming your way.

An increased limit implies a higher quantum of credit at your disposal. If you spend wisely, an increased limit is an asset. However, if you are unstructured with your spending, it can fast-track you into a debt trap. With an increased credit limit comes an increased responsibility.
First Published on Nov 6, 2015 11:48 am
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