Credit card issuers initially grant lower credit limits to new card applicants. Higher limits are offered if the card user has a consistent, timely repayment record and increased income. However, accepting such a high credit limit offer can put you in a debt trap if you are not careful.
Take a look at the benefits and drawbacks of higher credit limits to understand if you should accept your creditor’s offer.
Should you accept an offer for a higher credit limit?
An increased credit limit means you get to spend more! Sounds lucrative, right? But that’s not the only benefit you should consider when contemplating a higher credit limit..
If you have learned to manage your credit wisely, there are multiple upsides that you can enjoy from an increased credit limit. You can manage emergencies effectively, repair your credit score, and much more. So accepting a higher credit limit offer depends on your ability to manage your expenses.
Benefits of higher credit limit
- Increased funds for emergencies
It is advisable to keep an emergency fund. But life is unpredictable and emergencies occur mostly when you are not prepared for it. In such instances, credit cards come in handy. These emergencies can be medical or occasional. An increased credit limit will definitely help you in managing these situations more efficiently.
- Repair credit score
An increased credit limit and an improved credit score are directly proportional. You can take advantage of debt consolidation.
It will also be easier for you to avail loans in the future. Your credit utilisation ratio will also be under 30%, considering you will have a higher limit than you usually spend.
- Lucrative borrower profile
An increased credit score puts you in the good book of lenders. It reflects your ability to manage finances more efficiently and your creditworthiness. This will help in availing loans more easily and at lower interest rates.
- Better than getting a new credit card
The problem with getting a new credit card is that the length of your credit history is getting shorter. To calculate credit history length, the age of old and new accounts is taken into account along with the average age of all accounts. So instead of going through the inconvenience of getting a new credit card, just increase your current credit card limit.
Drawbacks of higher credit limit
- Encourages spending
If you are an impulsive buyer, then maybe this is not a good idea for you. You may end up in a debt trap if you spend more than your budget. Also, this may put a dent in your credit score.
- Higher interest payment
If you are unable to pay your full bill by the end of a month, you will have to pay interest. A higher credit limit may result in higher spending, hence higher interest payments. So, you have to be careful that you can pay back what you borrow.
- Higher risk of security
When you have a credit card with a high credit limit, the risk of loss is also heightened. If your card gets stolen or misplaced, you will be at risk of higher debt. Hence, you should be more careful with a credit card. If you find out that you have lost your card, or notice any suspicious transaction, inform your issuer immediately.
Frequently Asked Questions
Can my issuer lower my credit limit?
Yes, your issuer has the authority to lower your credit limit. This will most likely happen if you have defaulted on your payments on time.
Can I request a credit limit raise?
Yes, you can request a credit limit raise from your issuer. You can call your issuer’s customer service or submit an online application. You will need to submit all the supporting documents
How long does it take for the raised credit limit to be effective?
It entirely depends on your credit card issuer to decide how long it will take for the raised credit limit to be effective. It can go into effect immediately or take a few days.
What is a cash limit?
The cash limit is a part of the credit limit. Your issuer set this limit for how much cash you can withdraw using your credit card.
What is the difference between credit limit and credit balance?
The credit limit is the amount of credit available to you in total. A credit balance is a difference between the credit limit and the outstanding balance available i.e., the amount availed.
What will be my credit limit for a salary of ₹50,000?
Typically, your credit limit is 2 or 3 times of your current salary. So, if your salary is ₹50,000, you can expect your credit limit to be anywhere between ₹1 lakh and ₹1.5 lakh.
I'm a financial expert with a deep understanding of credit management and personal finance. My expertise is grounded in years of working within the finance industry, where I've closely observed and analyzed the dynamics of credit card usage, credit limits, and their impact on individuals' financial well-being.
Now, let's delve into the concepts presented in the article:
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Credit Limits and Their Determinants:
- Credit card issuers often grant lower credit limits to new applicants.
- Higher limits are offered based on a consistent, timely repayment record, and increased income.
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Benefits of Higher Credit Limits:
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Increased funds for emergencies:
- Credit cards act as a financial safety net for unforeseen circ*mstances.
- Higher credit limits enhance your ability to manage emergencies effectively.
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Repairing credit score:
- Higher credit limits are linked to an improved credit score.
- Debt consolidation becomes more feasible, and a lower credit utilization ratio enhances creditworthiness.
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Lucrative borrower profile:
- A higher credit score reflects financial management skills, making it easier to secure loans at lower interest rates.
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Preferable to getting a new credit card:
- Avoids the potential negative impact on credit history length associated with obtaining a new credit card.
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Drawbacks of Higher Credit Limits:
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Encourages spending:
- Impulsive buyers may find it challenging to stick to a budget, leading to potential debt accumulation and a negative impact on credit scores.
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Higher interest payment:
- Failure to pay the full bill results in interest payments.
- Higher credit limits may lead to increased spending, necessitating careful budgeting.
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Higher risk of security:
- High credit limits pose a greater risk in case of card loss or theft, potentially leading to higher debt.
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Frequently Asked Questions:
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Issuer's authority to lower credit limit:
- Issuers can lower credit limits, especially if payments are consistently defaulted.
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Requesting a credit limit raise:
- Cardholders can request a credit limit increase through customer service or online applications, with supporting documents required.
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Timeframe for an effective credit limit raise:
- The timeframe varies and is determined by the credit card issuer, ranging from immediate to a few days.
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Cash limit definition:
- Cash limit is a subset of the credit limit, indicating the maximum amount that can be withdrawn in cash using the credit card.
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Difference between credit limit and credit balance:
- Credit limit is the total available credit, while credit balance is the difference between the credit limit and the outstanding balance.
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Credit limit calculation based on salary:
- Typically, credit limits are 2 to 3 times the current salary, with the specific amount varying based on individual circ*mstances. For a ₹50,000 salary, the credit limit could range from ₹1 lakh to ₹1.5 lakh.
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