Pros & Cons of a High Credit Card Limit

Pros & Cons of a High Credit Card Limit

 

Credit card is a plastic issued by a bank with a pre-defined credit limit. This limit is basically the maximum amount which the Credit Card issuer makes available to its customers over a fixed time period, generally one month, for making purchases at various merchant establishments. Credit limit is determined by one’s credit worthiness and is designed to ensure that the customer has the relevant repayment capability. Over a period of time, the cardholder’s income generally increases and the need for an increased credit limit is felt. At this point of time, one can apply for an enhancement of the credit limit. An increased credit line gives the cardholder greater power to spend. With increased spending power come add-on responsibilities!

For a complete understanding of an increased credit line, let us examine the pros and cons of the same.

Pros

  • Helps in making bigger purchases

An increase in Credit Card limit gives quick access to more funds allowing the Credit card user to enjoy additional benefit of bigger purchases.

  • Improves credit score when used prudently

Let us consider an example. Given a credit line of 1,00,000/-, if one most often utilizes 40,000/- of the same, then  40% of the credit limit has been used. But, if the same credit limit is extended to 1,50,000/- keeping the expenses same, the utilization amounts to merely 26.66% of the credit limit.

In such a situation, a user can demonstrate the ability to repay the amount in full and hence, considered as a financially secure & responsible credit card holder by the financial institutions. This also improves the credit score thereby, making it easier for the cardholder to avail loans at lower rates.

  • More Rewards/Discounts

Every swipe of a credit card brings with itself cash-back, reward points, etc. and when the credit line is higher and expenditure is more, the rewards that come with its use are equally bigger. Not only this,these benefits multiply when the cardholder pays back the credit card bills on time. The reward points so obtained give the cardholder freedom to spend on hotel bookings, tickets, dining etc. thus reducing the direct cash-outs.

Having seen the positive aspects of receiving an increase in credit limit, we shall now move to the negative impact that high credit line has on the cardholder.

Cons

  • Strict enquiry on the credit report

Normally, banks update the credit limit of the cardholder depending on their rise in income, payment history and loan defaults. If everything goes well, the bank itself increases the credit line of the cardholder.

Another choice that the user has is asking the bank for an increase in the credit line. In the latter case, credit card issuer conducts an enquiry to evaluate the existing credit of the customer. Multiple such enquiries can reduce the credit score and hence, have a negative impact on the credit report of the card holder, thus, making it challenging for him to avail loans at competitive rates in future.

  • Could lead to more debt

High credit limit enhances the purchasing power of the cardholder instantaneously. If the amount to be spent on monthly purchases is not decided judiciously and card dues are not repaid on time, the increased debt results in rapid increase in the interest, thus adversely impacting the cardholder’s liquidity.

  • High risk on theft

In case of theft, cards with higher credit limit will be riskier if one has the pin written on the card. Ensure that the pin is not mentioned on the credit card.

Furthermore, a cardholder who uses his credit card extensively but manages to clear off all the Credit Card bills on time is still not on the safer side. Extensive use of credit limit increases the credit utilization ratio (Amount of credit used as a percentage of total credit card limit) which is not considered good as per the credit report agencies. Ideally, one should not use more than 30% of the credit limit. Increase of credit line while keeping the expenses low will prove to be beneficial in the longer term ratings.

So, higher credit limit definitely increases one’s purchasing power but also increases the potential risks simultaneously. Nevertheless, this debt risk can be nullified if the Credit Cards is used sensibly.

 

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Category: #mmm news    Credit Card