Procrastination is like a credit card: it's a lot of fun until you get the bill. - Christopher Parker
Did you know that if you are not utilizing the full credit limit on your credit card, then you are seen as a 'financially responsible person' by the credit agencies and bureaus? This means that you stand a strong chance of getting a car loan, mortgage, home loan, another credit card, etc., very easily. This can be easily possible when you have a higher credit limit, and do not use it up entirely every month.
The difference in the amount will not only spell your credit worthiness, but will also help in increasing your credit score. These are just a few of the many benefits of having a higher credit limit.
However, it is also true that a high credit limit may prove to be a financial disaster for a person who does not have control over his expenses, and indulges in extravagant expenditure. Hence, there are many people who advocate having a sound credit limit which will not put you in debt. All this will make you wonder whether it is good to have a higher credit limit or not. Let us find out.
High Credit Limit is Good
Here are few reasons why you should consider increasing your credit limit.
Better Credit Score
Almost 30 percent of your credit score will be calculated based, on your overall credit card balance in terms of percentage of your total available credit, on all your cards. According to the FICO model of credit scoring, your credit score will get affected if you are spending almost entire credit limit every month. Your debt-to-limit ratio will determine your credit score. For example, you have a credit limit of USD1000, but you end up spending USD950 plus, every month. This may ding your credit score. Now imagine that the credit card issuing company increased your credit limit to USD3000 and you are spending around USD1000, then there is a considerable difference in the actual expenditure and credit balance. This kind of debt utilization will not affect your credit score negatively.
It is indeed a matter of convenience to have a credit card with a higher credit limit. This way, you will not feel the need to acquire more credit cards. Also, it is far easier to keep a record of expenditure on one credit card, rather than handling two or three of them.
It is always better that you have a higher credit limit because it will come handy during an emergency. Imagine that there is a medical emergency at your parent's place, and you need to make immediate payment of a considerable amount for the treatment. At such a time, having a credit card with a higher limit will prove to be beneficial.
Lower Interest Rate
If you have a higher credit limit and limited expenses, it will help to enhance your credit score. If you have a higher credit score, you may get a loan at a lower interest rate. You can even negotiate an excellent repayment plan or get a higher credit line. However, if your credit score is not up to the mark, you may get a higher rate of interest because of the risk associated with it.
Sometimes, it just feels secured that you have the funds with you, if some huge unavoidable expense suddenly crops up to destroy your financial planning. You know that even if you aren't carrying sufficient cash, you will be able to pay for anything with the credit card. It just helps to get over the fear that you do not have money to pay for an unforeseen major expenditure.
Imagine that the vintage guitar which you always wanted for your collection is on sale. Had it not been for the increased credit limit, you would not have been able to purchase it. One of the key benefits of a higher credit limit is that your purchasing power will also increase. This comes handy, specially when you are making an expensive purchase.
Many people do not put all their routine expenses on the credit card. However, if you are able to pay your credit card bill on time, then you can charge everything to it without the fear of having to pay an interest on it. An increased credit will allow you to put all your expenses, right from gas to dinner, on the card. The benefit of doing this is that you will get several reward points which you can then utilize for buying gifts, garments, jewelry, etc. You may also get cash-back deals, free gifts, vouchers, discounts, coupons, etc. You can also buy air tickets, hotel packages, etc., with your reward points.
Benefits of Making Purchases
There are several other benefits which come with the increased credit limit on your credit card. If you carefully read your credit card agreement, you will come to know. For example, there are many protection benefits which comes with your credit card like price protection, extended warranties, coverage for stolen items and damaged goods. Hence, it is advisable that you have a higher credit card limit.
One of the easiest ways to increase your credit is to actually get another credit card in your name. However, according to FICO, getting a new card can influence your credit score adversely. Hence, increasing your credit limit on the existing card is a better option. For a good credit score, your credit history will be taken into consideration. However, when you take a new card, it will have a shorter credit history, while an old card will ensure a longer credit history. A longer credit history may lead to a better credit score, as it is taken into consideration while calculating the same.
High Credit Limit is Bad
While these were the merits of having a higher credit limit, now take a look at its demerits.
Unless you exercise control on your expenditure, an increased credit limit on your credit card can prove detrimental to your finances. Knowing the fact that you own a greater power to buy things, might make you indulge in reckless shopping. This may blow your budget out of proportion. Just because you can shop on your credit card, you may end up spending more than what you can actually afford.
Higher Interest Rates
Nothing comes for free, so your increased credit limit is also going to be subjected to increased rates of interest. Try to skip one of the payments of your credit card, and you will see a huge amount for defaulting your payment.
Theft of Card
There are several types of credit card frauds in the market. Just imagine that you have a higher credit limit and your card gets stolen. You will stand the risk of losing all your credit because of this. The incurred expenses will be charged to your account. With a limited credit, you may incur less losses.
If you indulge in some undisciplined shopping owing to your increased credit limit, you may end up in debt. You may continue buying things which you always wanted to, but when the bill will reach you at the end of the month, you will be shocked. Don't forget that you will have to make payment for the dues, else, you will have to pay a heavy duty interest along with it. This will also affect your credit score adversely.
Remember that your income will not increase with the hike in your credit limit. Any credit card company will offer you a higher credit if you are paying your bills on time. However, you have to understand whether you can actually afford to pay back the increased amount of dues. Otherwise, you may land up in a debt.
Whether having a high credit limit is good or bad will be decided by the way you use your credit card. If you have huge expenses, it will affect your credit score and land you in debt. If there is a positive difference in your credit limit and actual expenses, it will definitely enhance your credit score. Now that you know the answer, plan your expenses and use the credit card wisely. Ensure that you get optimal benefits from the credit card and not the other way round.