Sumit Gupta, 24, got his first credit card in April this year with a credit limit of Rs.50000. Taking note of his timely repayment of dues by the due date, Sumit’s credit card issuer offered him a credit limit increase of Rs 30,000. Sumit does not want to accept the offer of enhanced credit limit fearing debt trap resulting from increased card spends. Like Sumit, there are many who avoid credit limit increase due to their fear of spending more than they can repay and hence, falling into a debt trap. However, for cardholders who can manage their credit wisely and repay their bills timely, credit limit increases can lead to several benefits.
Here are some of the advantages of enhanced credit limit:
Higher credit score – Credit bureaus consider your credit utilization ratio while calculating your credit score. This ratio is the proportion of your total credit limit availed by you. Lenders consider loan applicants with credit utilization ratio of over 30–40% as risky and therefore, more likely to default. Thus, credit bureaus would too reduce your credit score on breaching those limits. In this sceanrio, an increase in credit limit will decrease your credit utilization ratio - provided your card spends remain the same. This would invariably increase your credit score.
For instance, assume that you spent Rs 20,000 in a particular month on your credit card having a credit limit of Rs 50,000. The credit utilization ratio for that month would be 40%. Now if your credit card issuer increases your credit limit to Rs 80,000, your credit utilization ratio will come down to 25%, thereby increasing your credit score.
Greater ability to deal with financial exigencies- An increased credit card limit acts can act as a source of emergency fund during financial crises emanating from health emergencies, loss of job or some other unforeseen expense. With enhanced credit limit on your card, you would be able to draw larger sums from your credit card.
Additionally, select cardholders with good repayment history are also allowed to avail pre-approved loans against credit cards. These loans are similar to personal loans in terms of rate and tenure but have faster disbursal period, usually within a couple of hours. As the loan amount in case of loans against credit card would never exceed your credit limit, an enhanced credit limit might make you eligible for bigger loan amounts.
Increased scope for earning higher rewards – Both card issuers and merchants offer attractive discounts, cashback offers and reward points on card spend. Such offers help bring down your transaction costs while relieving you from the hassle of carrying cash. A credit limit increase will enable you to make higher amount credit card transactions, which will increase the scope of earning discounts, cashbacks and reward points – all this without hurting your credit score.
Enhanced capacity for making big-ticket card spends- Higher credit limit will allow you to route big ticket transactions through your credit card. This may not only earn you more reward points or cashbacks, you can also easily convert such large transaction amounts into EMIs at attractive interest rates. For example, a person with sufficient credit limit can even use his credit card to make a down-payment for a car.
Cost-effective substitute to multiple cards- People often apply for additional credit cards to increase their credit limit. However, multiple cards also bring along with them additional costs in the form of annual and joining fees. Moreover, multiple credit cards also bring with them multiple due dates and multiple outstanding balances, which can be inconvenient. For those who are not good at tracking dates and amounts, multiple cards can lead them to increased costs in the form of late payment fee and finance charges. A single card with higher credit limit will allow you to avoid the additional costs and the hassle of remembering multiple due dates and payments.
—By Sahil Arora – VP& Head of Payments Products, Paisabazaar.com
