Imagine a scenario where you are using your credit card for the past few months and now are contemplating an increase in your credit card limit. You could be facing a shortage of finances for everyday spending or need to make some big purchases. Now what you probably did right is keep track of your spending pattern. Not being a spendthrift and over shooting your credit card limit will allow you to stay away from falling into debt.
What is Credit Card limit?
This is the maximum outstanding balance you can hold on your credit card at a given point in time without paying a penalty. If you over spend the credit limit, you will have to pay a penalty fee and continually doing so could lead you to debt and affect your credit score.
To check your credit limit, check your billing statement or call up your credit card company’s customer service. The credit card limit influences your debt to credit ratio. It is nothing but the total amount of credit limit compared to the total amount you spend out of that limit. For e.g. If your credit card limit is Rs.50,000, and the total amount that you have spent is Rs.45,000, then your credit utilization is high and as a result indicates a high debt to credit ratio. A high debt to credit ratio indicates a potential debt in the future.
The best time to apply for a credit limit increase would be when you get a raise. An increase in income will give you the confidence that you are capable of clearing the credit card bill. You might have to provide proof in the form of salary slips to support the increase in income. On time payment of credit card bills, a healthy credit score and no debt are indicators to the card issuer that you are more likely to make payments on time even with the increase in limit.
Still wondering if going for an increase in credit limit is worth it or not? You do need to ask yourself these questions before approaching the card company to increase the credit card limit.
Am I happy with my current credit limit?
Look at how your current credit card limit is working out for you with respect to your expenses, your savings and financial goals. If you feel it is not sufficient to meet your requirements, then it would make sense to opt for an increased credit limit. Keep in mind that excessive usage of your credit card month on month without paying the bills on time could lead to credit card debt. So look for a strong reason to go for a credit limit increase.
How much more credit limit should I opt for?
The credit card limit increase will again depend on your income, current debt lever and how promptly you make bill payments on time. In case you have a history of delayed payments, moved to a job with a lower income or already into quite a lot of debt then your application for a credit limit increase will be rejected. But the limit you want to increase to should be within your repaying capacity. Just because you need more funds to spend each month should not be a parameter.
What to keep in mind before applying for a limit increase
- Good reason – Ensure that the increase is necessary and not just luxury expense cover. Keep an eye on your spending patterns and your handling of current debt obligations. If you are prompt with payments then only apply for an increase in credit card limit. The card issuer will check your credit bureau score on receiving your request, which could affect your credit bureau score. So have a good enough reason to apply for a limit increase.
- Asking too soon and too much – Most credit card companies will automatically forward you a limit increase request if your credit behavior is found positive after around 6 months of credit card membership. In case that does not happen, then ideally wait for at least 6 months before applying for a credit limit increase. Also be a bit conservative. The decision to increase your credit limit will always be based on your credit so look to ask for an increase of 10-25% instead of straight up doubling the limit. In case you own multiple credit cards, remind the issuer that you want a limit increase only on the most used credit card and not all.
- Credit bureau score – A good credit score plays an important role in financial well being. Before you apply for a limit increase, check your credit report. Asking for a credit limit increase is like asking for a new loan. Repeated inquiries for a limit increase will show up on your report and the credit bureau could interpret your repeated inquiries as a desperate need for funds.
How can an increased credit limit help?
- Lower credit utilization – An increased credit limit can help reduce your credit utilization, if used wisely. If, for example, you have an initial credit card limit of Rs. 50,000 and utilize around Rs.25,000 each month then your credit utilization is half. But if you increase the limit from Rs.50,000 to Rs.75,000 and still continue utilizing Rs.25000 then your debt to credit ratio reduces to 33.3%. This way your credit score remains positive thanks to low credit utilization.
- Rewards and loans – Not everyone gets a credit limit increase. A high credit limit indicates that the bank or credit card issuing company considers your financial health to be strong and stable. This allows you to apply for a personal loan or a credit card loan during emergencies. A higher credit limit means you are a valued card holder and will be rewarded with special offers, points and benefits.
- Enhanced credit bureau score – It may seem that with a lower credit limit you can maintain a good bureau score. But, by increasing your credit limit, you can actually improve the credit bureau score. The credit bureau assumes that with a superior credit limit you are ably managing your credit.
- Multiple credit cards – You might own multiple credit cards and risk damaging your credit score in the process. A better option would be to ask the credit card issuer to increase your credit limit so that you can easily manage your expenditures using only 1 credit card. Processing fee and maintenance fees on multiple cards could prove costly. Instead make use of one card with increased credit limit and focus on maintaining a good repayment history with it.