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The first thing that comes across the mind with credit card is the splurge temptations that prompt you to purchase everything from the cashless instrument. Yes, credit card does allow you to do a variety of things such as paying your utility bills, online shopping for travel and movie tickets, dining at expensive restaurants, swiping at petrol pumps, etc. But the extent of purchase is highly dependent on the credit limit given on your credit card. More the credit limit, more you can shop with credit card and vice-e-versa. Everyone would vouch for higher credit limit, won’t they. But there can be some ill-effects with higher credit limit. So, we have decided to analyse higher credit limit in terms of both advantages and disadvantages. But before that, let’s know what is credit limit and how it gets set.
Credit limit denotes the maximum amount of money that you can borrow from banks or non-banking finance companies (NBFCs) on your credit card. You can purchase via credit card upto the limit given to you.
How banks set credit limit
Banks check various parameters before setting the final credit limit on your credit card. The parameters include your gross salary in the month, credit score, etc. Subsequent to scrutinizing the details, banks come up with the credit limit based on their credit policy. It may happen that the credit limit offered to you on your credit card can be higher or lower. If you fall in the latter category, you do not need to worry as banks usually revise credit limit after 6-18 months from the time of credit card issuance. If you are found to have paid bills on time and your income grows higher, then the bank can increase your credit limit.
Advantages of higher credit limit
Lower Credit Utilization & Higher Credit Score- With higher credit limit on credit card, you can utilize your credit in a systematic manner if you become judicious in your purchase. Being judicious can will boost your credit score. For instance- If the limit on your credit card is Rs 75,000 and you utilize around Rs 20,000 monthly on an average. In that case, you are utilizing only 26.67% of your credit limit. If the bank raises your credit limit to Rs 1,00,000 after the revision and your spending remains the same as earlier, then credit utilization will reduce further to 20%. It indicates that you are spending much lesser than the limit available on your credit card. This will ultimately improve your credit score.
Loan Access- After you boost your credit score by paying off the bills on time and spending judiciously via credit card, you can ask for loan against the cashless instrument. Bank will consider you as a safe asset and can disburse you the loan to meet your requirements.
Meets Purchase Requirements in Emergencies- When you face an emergency like situation, the higher credit limit will help you meet the soaring expenses at that time. The emergencies can be your medical treatment or of someone else in your family, spike in costs of foods at your preferred restaurants, rise in accommodation charges of your hotels & resorts at your favourite holiday destinations , etc.
More Rewards– You can expect to get more reward points on the purchase via credit card with a higher credit limit. In a bid to maintain customer loyalty, banks reward their privilege cardholders with additional reward points and added benefits.
Injudicious Spending- There is an increasing fear of you being caught into the debt trap with higher credit limit, which will always tempt you to buy more even when you do not require to. Overspending can lead you to deal with the hassle of mounting bills, which can so easily dent your budget. The interest liability will be much more on such bills.
Weak Credit Score– Credit score weakens considerably on injudicious use of the credit card that can utilize a significantly higher proportion of the credit limit. And if the credit score weakens, chances are huge that the application of your future loan can get rejected by the bank.
Security Risk- Security risk does arise with higher credit limit. God forbid, if a fraudster or a hacker get the details of your card, which may not be utilized even 10%, then the damages can be colossal. So, you must set up alerts, which will help the banks inform you that when a transaction that does not match your spending patterns.
So, enjoy the higher credit limit but be wary of injudicious spending for hassle-free credit card experience and added benefits.