A very important component of a credit card is its credit limit. This limit indicates the maximum amount of money that one is ought to borrow from banks on their credit cards. This limit varies from person to person and a lot of factors, mainly the income/salary of the applicant. Other determinants include a good payment history, spending habits etcetera.
Everyone has different spending habits. Some lavish, some moderate and some calculative. Depending upon the average amount you spend in a particular duration of time, a higher credit card limit may have several advantages as well as drawbacks. Some of them are given below.
Advantages of Increasing Credit Card Limit
An increase in the purchasing power
It’s quite obvious that when a person’s credit limit is high, there will be more funds available to buy stuff and that will imply an increase in the purchasing power of the individual. It will give the individual scope for making bigger purchases, for both good or bad. There are many people who don’t like spending the existing cash that they have on gadgets, electrical appliances etc. One option available is store financing but since it starts another line of credit no one wants more hassle. In such scenarios, an increased credit card limit can be very beneficial as no one has to worry about a new credit line while buying something expensive.
Money for cloudy days
Life is a bumpy ride and is filled with unexpected twists and turns that one may or may not be prepared for. One such very common turn often comes in the form of a financial crisis when things start falling beyond the budget that one may have anticipated. During emergency situations such as to pay high medical bills, car repairs, damage to the house and many more, an increased credit limit may act as the last resort and save one from any such crisis as a low credit limit card can not be of much use especially if the limit is already near.
An increase in the credit score
A very crucial component of acquiring a credit card is to maintain the credit score or debt to credit ratio. This implies that if you owe the bank 1500 AED and your limit is 2000 AED that means it will adversely affect the credit score due to high ratio. In this case, it will be 3:4. But if you have a credit limit is 3000 AED and you have reached 1000 AED, the debt to credit ratio will be significantly low and that would automatically boost the credit ratio. In the given case it will be 3:1. This will further increase the option of increasing the credit limit at any point if needed.
Having an increased credit limit implies that one has been successfully following the protocols of the bank and is hence eligible for an increase in the credit limit, further implying that there has been a stable flow of income. It gives one the assurity that he/she is on the right track financially and is efficient to earn and pay back what has been borrowed.
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Disadvantages of Increasing Credit Card Limit
Even though there are various advantages of increasing credit card limit however it comes with certain drawbacks as well,
More debt to be paid off
The most primary and obvious one being an increase in debt to be paid. If a person has higher credit card limit, it automatically means that the person also has more purchasing power. Though it is very easy to use credit cards, it can be tough to keep track of all the purchases and to stop when necessary.
Interest rates or late payment charges
Spending is very easy and anyone can do that however paying back what is spent on borrowed money is an issue. Unless the debtor pays the balance every month in full, one is liable to pay a certain percent of it as interest. In case one fails to spend within the credit card limit, he/she would have to pay additional charges to the bank. This way the person has to pay back way more than what he/she borrowed.
If one’s credit card score is increasing, this means that the person has a higher probability of obtaining new loans or credit cards. Bankers keep presenting such tempting opportunities that are hard to say No to and before the person knows, he/ she is stuck in a debt trap and this spiral increases the purchasing power which ultimately leads to high amount of payback. It increases one’s reliance on credit cards.
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A deceiving sense of security
This disadvantage is highly applicable to those who have got themselves into the habit of leading a lavish lifestyle through credit and fail to monitor their spending habits strictly on a regular basis. Instead of getting the best out of credit cards, one will fall into traps and the worst side of credit cards. One may also start applying for more credit cards and later get under the false impression that the credit card score is increasing when in reality, it’s just the addition of new enquires due to additional credit cards and can have a bad impact on the credit score if the credit utilisation ratio goes bad.
Availing an increase in credit card limit is great to an extent but one needs to be well informed and wise enough to not be fooled by companies or drowned because of extravagant habits. It is very important to get all the necessary information beforehand. It is also important to monitor your habits and view your credit card as a responsibility and not just as a means of spending more.
Maintenance of credit score is equally necessary or else it gets difficult to avail loans when they are actually needed. Hence, accept a higher credit limit not only with an open heart but also with an open mind.