Reducing Your Credit Card Limit Won’t Help Change Your Spending Habits
Credit Cards are considered one of the best financial products to help you build a sound credit history. By using them judiciously, you can not only create credit history but can also maximise your credit score. A Credit Card is aline of credit which works on the principle of revolving credit.
When you Apply for a New Credit Card Online, it comes with a pre-approved limit, which is the maximum amount you can spend on your card. The limit is reduced by the amount you spend and is replenished with every payment you make. All Credit Cards come with an interest-free period, ranging from 15-60 days, during this period if you repay the entire amount due, you need not pay any interest on it,and similarly, if you do not pay the entire amount by that time, you will need to pay interest from the first day itself.
With the rising popularity of e-commerce and digital payments, Credit Card usage has witnessed a significant boost in the recent times. In order to maximise the opportunity, all Credit Card issuing companies offer the facility to apply for a Credit Card online from a vast range of offers. These cards offer you special rewards and bonuses on usage along with exciting cashback offers, encouraging their usage.
Why Does a Reduction in Credit Card Limit Happen?
All Credit Cards come with a pre-approved limit which is the total amount that you can spend unless you repay the amount utilised. But under certain circumstances, the limit on your Credit Card can be reduced due to following factors:
- Credit Card companies conduct quarterly or half-yearly reviews of every card usage patterns,and if they feel that their risk associated with your card is high, they might reduce the limit.
- Sometimes, due to internal policy changes, the card limits can be reduced without any fault of yours.
- If you make frequent cash withdrawals against your card, it is seen as risky behaviour and would lead to a reduction in your card limit.
- You yourself feel that you do not require such high limit and opt to reduce the limit.
- You might feel that in order to reduce your exposure to Credit Card debt, reduction in the limit could be a good
These are some of the primary reasons that lead to a reduction in your Credit Card limit. But is the reduction in the limit a boon for you or is a bane?
Why Would It Not Help in Changing Your Spending Habits?
Reduction in card limit if done by your Credit Card issuer, then there is nothing much you can do. But if you yourself opt to reduce your card limit, it would instead harm you than do any good. Read further to understand the implications of this decision:
- Will not help with your credit score: Your Credit Card limit has got nothing to do with your credit score. It is your credit utilisation ratio (CUR) that has an impact on your credit score. If your CUR is above 30%, then it would have a negative impact on your credit score. So, reducing your card limit is not going to help with your credit score,and there is no point in reducing the amount available to you as it could be handy in case of an emergency.
- You will forego various benefits: Credit Cards offer significant advantages when used for making specific transactions in the form of cashbacks, discounts, free EMIs (Equated Monthly Instalments) and many more. These benefits help you save a lot of money on your regular monthly expenditure, which you have to do anyway. So, foregoing these benefits is not a prudent choice.
- It would increase CUR: If you feel that your CUR is high and reducing your limit would help you, then you are mistaken. Reducing your card limit would instead significantly increase your CUR and would, in turn, impact your credit score negatively. Additionally, in order to reduce your card limit, you first need to pay the amount outstanding and if you are going to pay that much money, then why go for reduction of the credit limit, as you could use the amount in case of an emergency.
- Manage your expenses instead: It would be a better decision to change your spending habits rather than reducing your credit limit to manage your debt exposure. You should learn to use your card judiciously and try to repay as much amount possible every month to bring down the CUR. Similarly, you must not fall into the minimum payment trap and try to use cash for various sundry expenses. By changing your spending patterns, you can quickly reduce your Credit Card debt without opting for limit reduction.
Reduction in card limit is not a wise decision unless you are thinking of closing the Credit Card in some time. It could otherwise deal a severe blow to your credit history.
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