Now, if Kumar's card's credit limit is increased, his credit utilisation ratio would come down. For instance, if the credit limit was `1.5 lakh instead of `50,000, Kumar's credit utilisation ratio for spending `40,000 a month would be 27%. Most banks revise the credit limit from time-to-time based on the user's repayment history , transactions, outstanding loans and rise in income. A cardholder can also request the issuing bank for a hike in credit limit. There is usually no additional cost involved, though an increase through a card upgrade may attract charges.
THE BENEFITS
BETTER CREDIT SCORE
A lower credit utilisation ratio improves the card holder's credit score, making him a less risky customer in the eyes of the lender. A higher credit limit can also be used as a bargaining tool to get a bigger loan from the issuing bank.
HELPFUL IN EMERGENCIES
A credit card with a big limit comes in handy during emergencies like a sudden hospitalisation where large payments have to be made upfront.
MORE BUYING POWER
A card with a higher limit makes big purchases, like white goods for the home, easy to make.
THE DEMERITS
ENCOURAGES RECKLESS SPENDING
It is a bad idea for compulsive shoppers who can easily throw their budget off track by recklessly buying with their credit cards. This again has a negative impact on the credit score.
SECURITY RISK
If the safety of the card is compromised, the damages can be high. To mitigate the risk of fraud, users should set up alerts whereby the bank informs them when a transaction that does not match their usual spending pattern is noticed.
HIGH INTEREST OUTGO
As the increased credit limit can also mean greater spending, the chances of the card holder being unable to repay the amount in full in a month also increases.This translates to high interest outgo.
Another way of increasing one's credit limit is by opting for multiple credit cards. However, there are pitfalls here too. You will spend more and there is a high chance of default if you cannot manage payments and credit period well. This will negatively impact your credit score. A single credit card with a higher limit is a better solution. You will also save on annual fees of multiple cards.
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