Credit limit increases: How they impact your credit score and financial health

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Banks often give credit card holders an increased spending limit. To many, it seems like an appreciation for being responsible as far as paying back is concerned. But should you accept it? Everything depends on how you utilize credit. A higher limit can improve your credit score if utilized correctly but also tempt overspending and damage your financial health.

How a higher limit can improve your score

One of the biggest factors in establishing your credit score is your credit utilization ratio—the percentage of available credit you're employing. Experts advise you to have it below 30%. Suppose your card carries a ₹1 lakh limit and you use ₹30,000 per month. Your utilization is 30%. Your bank raises your limit to ₹2 lakh and you spend the same amount. Your utilization then drops to 15%, which helps your score.

A higher limit is beneficial to your credit history as a whole since it tells lenders that you are worthy of being trusted with more borrowing power. It is especially useful if you will be applying for a home loan or personal loan in the near future.

Where it can go wrong

Though a rise in the credit limit will benefit your credit score, it is also risky. A raised limit will cause some users to feel that they can spend more as they have more money available. More spending will lead to higher balances and interest charges if you don't pay your bill in full. If you overspend, you will miss payments, and your score will suffer despite the raised limit.

At times, repeated or aggressive rate increases on multiple cards may make lenders think that you are becoming credit-hungry, which is a problem if you're seeking a big loan.

When you should accept

If you are already timely paying your bills and do not have balances, asking for a credit limit increase usually benefits you. It lowers your utilization ratio and enhances your freedom to spend. It even serves as a buffer in case of emergencies. But if you tend to overspend or only pay minimums, it would be wise to decline until you get your payment habits in order.

The bottom line

Carrying a higher credit limit will benefit your credit score, provided that you use it sensibly. The real secret is discipline: treat the new limit as a little extra room to manoeuvre, not an excuse to overspend. With judicious restraint, it will improve your score and provide more financial freedom.

FAQs

Q1. Will my bank automatically increase my credit limit?

Sometimes, banks increase the borrowers' limits with a good repayment history automatically. In other cases, they make it accessible with your consent or even permit you to apply.

Q2. Will an increase in credit limit affect my prospects for obtaining other loans?

Yes. A high limit used sensibly can enhance your credit history, whereby you can avail of loans at more favourable interest rates.

Q3. Can I request an increase in the credit limit on my own?

Yes, you can also apply through your bank's website, app, or customer service. Your repayment history and income can be verified by the bank prior to approving.