Many people often relate higher credit limit on their credit card to their status. But the benefits of a higher credit limit are not limited to just this but have some real world benefits also. Your credit limit is basically the amount you can borrow from a credit card company. Your credit limit is decided by the banks on the basis of various factors such as your credit score, your income and your past repayment track record. As these factors improve, bank reserves the right to increase your credit limit accordingly. But is an increased credit card limit good or bad for you? If used prudently you can enjoy the following benefits.
- Higher credit score
As your credit limit goes up your credit utilization ratio declines at the same level of spends. Credit utilization ratio is calculated by diving the monthly spend by credit limit. Suppose, you have a credit limit of Rs 50,000 and you spend Rs 10,000 on a monthly basis on your credit card. Your credit utilization ratio works out to be it 20%. If your credit limit is raised by your bank to Rs 75,000, the credit utilization ratio will come down to 13.33%. A lower credit utilization ratio signifies that you are spending lower than your approved credit limit and that you are less likely to default as the debt burden is lower. All this will augur well for your credit score.
- Better equipped to face emergencies
Credit cards can come to your rescue in case of emergencies when you need funds. A higher credit limit will provide you more cash in case of emergency. You don’t have to look for options such a personal loan or loan from relatives and friends if you have higher credit limit.
- Higher rewards
Higher credit limit is given to premium customers and for premium customers credit card companies offer higher reward points and better offers. As you are likely to spend more, if you have a higher credit limit, you will also earn more reward points which you can redeem to avail various discounts and other benefits.
- Lesser number of cards to manage
You can have higher credit limit with large number of credit cards but handling multiple credit cards can be cumbersome as you have to remember their due date separately and have to make sure that you make the payment before due date. You can limit the number of credit cards to 2-3 cards (Read: 3 reasons why you should have more than one credit card) depending on your spending habits and increase the credit limit in them rather than acquiring new credit cards.
- Higher credit
A higher credit card limit implies that the bank considers you safe borrower. Therefore if you apply for a loan with the same bank or any other bank you can use the higher credit limit to negotiate for a bigger loan amount.
A higher credit limit can be used to your advantage but if used judiciously. You get a credit of higher amount during the free-credit period. But always remember that a higher credit limit comes with a higher responsibility.