Credit card issuers offer cardholders increased credit limits on their existing cards in case of consistent spending and repayment records and/or steady increase in income. However, many cardholders are apprehensive of accepting such offer owing to the fear of falling into debt trap. But, increasing credit limit can bring along several benefits for those who manage their finances well and repay bills on time. Let’s look at some of the benefits closely:
1. Higher credit score
Credit bureaus factor in credit utilization ratio while calculating credit scores. This ratio denotes the proportion of your total credit limit used by you. Lenders consider those with credit utilization ratio of 30–40%, and as credit hungry people are more likely to default, credit bureaus reduce credit score on breaching those limits.
If you are consistently breaching 30-40% of your credit limit, the easiest way to reduce your credit utilisation ratio is to request credit limit increase from your existing card issuer(s). For example, assume that you spent Rs 30,000 through your credit cards in a month against the total credit limit of Rs 75,000. Your credit utilization ratio for that month would be 40%. Now, if your existing credit card issuers increase your credit limit to Rs 1 lakh and your card spends remain the same, your credit utilization ratio for that month will come down to 30%. Credit bureaus will take note of your reduced credit utilisation ratio and increase your credit score, accordingly.
2. Higher reward points and other card benefits
Card issuers offer attractive discounts, cashback offers and even higher reward points on making card spends at select merchants. Such offers may reduce your overall transaction costs by a significant margin. A higher credit limit will allow you to make higher amount credit card transactions and save more through discounts, cashbacks and reward points. All these without hurting your credit score.
3. Enhanced capacity for making big-ticket card spends
Today, many credit cards waive off joining and/or annual fee or offer free vouchers/air-tickets on spending beyond certain pre-determined threshold amount. Additionally, you may also get to earn incremental reward points on higher spends. Thus, a higher credit limit will not only increase your overall capacity of making credit card transactions, it will also allow you to route your big-ticket spends through credit card and reach those threshold amounts quicker. Those with good credit card repayment history may also get to convert their big ticket spends and even entire credit card balance into EMIs at attractive rates.
4. Higher loan amount on loan against credit card
Most credit card issuers offer pre-approved ‘loan against credit card’ to those with good repayment history. These loans are similar to personal loans as they do not come with any end usage restrictions. Their interest rates and loan tenure are also generally similar to that of personal loans. Being pre-approved loans, they are mostly disbursed within the same day of application whereas disbursal of personal loans can take anywhere from 2 to 7 days.
As the loan amount in ‘loans against credit card’ can never exceed your credit limit on that card, a higher credit limit would allow you to avail a bigger loan amount. Moreover, loan against credit card would also reduce your available credit limit on that card by the amount of loan availed. Thus, a higher credit limit on that card might leave you with a spare limit for further credit card usage.
5. Better prepared to deal with financial exigencies
An increased credit card limit can be of great help to deal with financial crises. A higher credit limit would allow you to transact larger sums through your credit card or avail pre-approved loans against credit card, if eligible.