Are you involved in increasing your credit limit? If yes, then you should ask yourself first why you want to increase your credit limit. If it is for shopping more and purchasing things that you can’t afford without credit, then you must not do that. Getting an increase in your credit limit would mean that you need to prove yourself and your bank that you will use credit responsibly. Getting an increase in your limit would mean that you have exemplified yourself as a good customer to your bank and thus getting this great facility. Increasing your credit limit should not mean that you get the opportunity to spend beyond your means. This opportunity can have several benefits if you use increased credit wisely.
The Benefits Of Increasing Your Credit Limit:-
1. Lowering Your Credit Utilization And Enhancing Your Credit Score
If you have used close to the total amount of credit available to you, then the credit scoring models will ding your credit score. This happens because it will consider you to be at risk of maxing out your credit cards and having difficulty in making future payments. This is how the scoring model works even if you feel that these risks don’t apply to you. If you are using 90% of your available credit then raising your credit limit will trim down that percentage and helps in improving your credit score.
2. Easier To Get Loans And Additional Credit
The credit bureaus will consider you financially responsible if you are nearly not using your available credit limit and this will also enhance your credit score. Once you have a higher credit score, you will have a better chance of getting approved for a credit card, car loan, personal loan or mortgage in the future. In fact, you will also have a better chance to get a loan at a lower interest rate and with the best deal. This happens because a strong credit score showcases your repayment capability.
3. Helps In An Emergency
Emergencies are unpredictable. It pops up at any time in anyone’s life, with no advance warning. So, having a high credit limit helps in handling emergency expenses on time like paying for medical bills, utility bills payment, paying for child’s school or school fees etc.
4. More Rewards
Having a higher credit limit means the credit card holders can spend more using their credit cards. People who always pay their full credit card bills on time can earn more rewards, thanks to their big and small purchases. Also, if their bank has increased their credit limit, it means that their banks consider them important and may offer more reward points and benefits. The cardholders can use their reward points for shopping, to book airline tickets, to buy household items, etc.
5. Makes Large Purchases Possible
Using your credit cards for large purposes is not just convenient but also helps you get good reward points. A card with a higher credit limit helps in making big purchases smooth and easy.
6. Getting Several Consumer Protection
With a rise in credit limit, some consumer protections attached with the card also increases. For example, MasterCard’s protections include extended warranties, price protection and coverage for damaged or stolen items. American Express offers similar benefits. Check your credit card agreement to see what protections apply to your cards.
7. Helps In Avoiding Credit Score Dings
One way of increasing one’s credit limit is by opting for multiple credit cards, but if you get an increase in your existing credit card can be a better option. The more cards you opt for, the more it may ding your credit score. When you choose to open a new account, it shortens the length of your credit history and having a longer credit history means a better score. The age of your oldest to newest account and the average age of all your accounts are factored into the length of your credit history. This may affect your credit score by 15%.
The Demerits Of Increasing Your Credit Limit:-
- Encourages Uncontrolled Spending
Having an increase in your credit limit is surely a bad idea for compulsive and impatient shoppers who can easily give up their budgeting by recklessly purchasing things form their credit cards. Using a credit limit to a large extent will put a negative impact on the credit score.
2. Security Risk
With the high-value credit card, the risk of fraud and the damages can be even higher. It may happen if the safety of the card is compromised and when banks inform the card users when a transaction doesn’t match with their usual spending pattern gets noticed.
3. High Interest
Increase in credit limit means greater spending. When you increase your spending, there may be a chance that you may not able to cope with the card payment in full in a month, which ultimately translates to high-interest outgo.
The Bottom Line
There are both merits and demerits of having an increased credit limit. If you take a higher credit limit as an option to spend more, then there is a high chance of default if you cannot manage to make payments on time. This will negatively impact your credit score. But if you consider an increase in your credit limit responsibly and wisely, then having a credit card with a higher credit limit can be a perfect solution for you. This would also help in improving your credit score.