Should you get a limit increase on your credit card?

Improves your Credit Score

While calculating your credit score, Credit Bureaus look at your Credit Utilization Ratio (CUR). A CUR is simply what you owe divided by your total available credit limit. For instance, if your credit limit is Rs. 1 lakh and you have spent Rs. 30,000 your CUR would be 30%.

A higher CUR makes you look credit hungry and issuers might hesitate to give you a credit card. Therefore, if you like to spend more via credit cards, it would be beneficial to accept the increase in credit limit if offered by the credit card issuer. Else, you can also contact your issuer and apply for an increase in your credit limit. In case your issuer refuses to increase the limit, you can apply for additional credit cards. This way, your total credit limit will be increased and your CUR would remain low.

Let us understand this with an example

You have a credit limit of Rs. 1 lakh and you spend almost Rs. 50,000 every month. This would make your CUR to be 50% which is not considered good by the credit bureaus. Now if your credit limit is enhanced to Rs. 2 lakh your CUR would drop down to 25% which would reflect your creditworthiness and not impact your credit score negatively.

Suggested read: Tips to lower your Credit Utilization Ratio (CUR)

Enhances your Chances of Loan Approval

Having a bigger credit limit improves your chances of getting a loan on your credit card with a greater limit.  Also, since your CUR is lowered with a higher credit limit, there are greater chances that your credit score will improve. Hence, the greater your credit score, the more are the chances of loan approval and that too at a lower interest rate.

Helps in the Time of Emergency

Having a higher credit limit acts as a source of emergency funds and can help you deal with financial shortfalls. A higher credit limit will enable you to meet financial shortages by routing unplanned expenditures through your credit card while maintaining your liquidity. Additionally, if you are unable to clear your credit card debt by the next due date, you can convert all or a fraction of it into Equated Monthly Installments (EMIs). This way, the interest rate on the outstanding balance can be reduced to a certain extent without paying the high finance charges.

Credit Card Debt

Although a higher credit card limit allows you to spend more, it may also lead to more debt if not handled carefully. With a higher credit limit, one may end up spending more impulsively than they can afford to repay. If you fail to pay your bills on time, it will negatively impact your credit score and make it difficult for you to obtain better credit in the future.

Credit Card Interest

If you do not pay your debt in full each month, you will probably end up paying more interest on the amount owed. As a result, if you have increased your credit card credit limit, there is a possibility that you may be unable to pay your bill in full. As a result, as a user, be aware of your spending habits and try to pay your credit card bill in full every month.

Getting a credit card limit increase may depend upon your choice as well as the need. In case you can be a responsible spender and know how to manage your finances efficiently, getting a credit limit increase may help you deal with your financial struggles. Else, you may end up incurring a lot of debt and hampering your finances as well as credit score.