Rohit has a credit limit of Rs 30,000 on his credit card and he often ends up availing credit of up to Rs 25,000. However, he makes sure to pay his credit card bill by or before the due date. Given his timely repayment schedule, Rohit’s bank has offered to increase his credit limit. However, he is in a dilemma as to whether to enhance the credit limit on his existing credit card or take a new card from other lenders.
There are many people like Rohit who desist from increasing their limit due to fear of a higher bill amount. However, if you have been a good borrower or you know how to manage your credit wisely, increasing your credit card limit can be beneficial. Below are some of the benefits of this:
1. Leads to better credit rating: As soon as your credit limit is enhanced, your credit utilisation ratio comes down, provided your credit card usage level remains the same. This ratio is the ratio of credit availed by you against the credit limit available to you. Taking the above mentioned example, if the credit limit on your card is Rs 30,000 and your monthly credit card usage is Rs 9,000, your credit utilisation ratio will be 30%. However, if your credit limit is increased to Rs 50,000, your credit utilisation ratio for that same usage will come down to 18%. A low credit utilisation ratio means that you are less credit hungry and are less likely to default. This, in turn, will improve your credit score. Ideally, your credit utilisation ratio should be about 30%.
2. Helps avoid managing multiple credit cards: Often, people apply for additional credit cards to increase their credit limit. However, multiple credit cards will not only increase hassles for you in terms of tracking them and settling their dues on time, increased transaction costs in terms of annual maintenance charges (AMC), and will also bring down your credit score. Instead, a single credit card with higher credit limit is much cheaper and easier to manage.
3. Helps in making big-ticket purchases efficiently: Suppose, you are planning to buy a smartphone worth Rs 55,000 and the credit limit on your credit card is Rs 40,000 only. Now, even if you want to purchase it through your credit card to earn reward points, you will not be able to do so in entirety. This means that you will have to forgo reward points on at least Rs 15,000. This is where enhanced credit limit on your card will help you. You can route your big-ticket purchases and get reward points from them. You can also convert your large-size transactions into EMIs without any documentation. Many lenders also offer interest-free payment holiday periods after large transactions, which allow you to spread your repayment over a certain period.
4. Increases reward points: Lenders offer attractive reward point programmes, discount offers, loyalty programmes and cash-back offers to their credit card customers. Many stores or online portals offer attractive discounts or cash-back offers on purchases made through specific credit cards. These offers can actually bring down your transaction costs while relieving you from carrying cash. The higher credit limit means that you have more elbow room for shifting from a cash transaction to a credit card transaction. More credit card transactions, in turn, will earn you more reward points or avail more discounts.
5. Acts as an emergency fund: Your enhanced credit limit can come in handy during your financial emergencies. Although people usually have emergency funds in place in the form of their savings account or fixed deposits, even savings accounts have ATM withdrawal limits and fixed deposits cannot be withdrawn on public holidays. There might be situations when your emergency fund can also fall short. In such scenarios, your credit card can be used to pay off emergency bills from unforeseen events.
However, all these benefits will come to naught if you cannot manage your finances wisely or if you happen to be an impulsive spender. You might, instead, end up with poor credit report and poor financial health. After all, while it is easier to get in to debt trap, it is very difficult to get out of it.
The author is Managing Director, Paisabazaar.com