ATM :: Increase in credit card limits- keep your usage under check

Rajiv Raj of explains the need to keep one’s utilisation under check despite bank’s decision to raise credit card limits. It will help in maintaining a healthy credit utilisation ratio.
Rajiv Raj | | Sep 25, 2013, 04.13 PM IST

The dynamic nature of financial markets sometimes can be befuddling for many. Any new development in markets would have misinterpretations and there would be a large part of retail consumers who buy into anything remotely connected to negativity or loss.

Such tendency gains currency and many believe negative news easily than a positive development. The upshot of this is misinformation and resultant resistance among retail investors even to understand and ascertain the reality of things.

Take for instance, the recent increase in the credit limit by banks to credit card holders who have spotless repaying record. Recently, I received e-mail from S Rajashekar, a businessman from Chennai.

His credit limit was increased and he accepted it. However, as he started preparing his file for home loan, someone told him that such an enquiry would lead to lower credit score popularly known as CIBIL score. And a worried Rajashekar wrote to me.

Some banks are going for increase in credit limit on credit cards issued to their customers on the basis of good repayment track record. Such a hike in credit limit does not depress your credit score. So keep your cool.

Here, the bank is not evaluating your credit card account afresh. It may however check your repayment history. That does not mean an enquiry to CIBIL and it is not counted as a loan application. So your CIBIL score remains intact. There is nothing to get worried about if you get a higher credit limit without providing any new income document.

But, you should be prudent enough while using increased credit limit on your credit card. Avoid borrowing too much on credit card. Banks typically offer you higher credit limit because you have been a prudent user of credit card. So, an increase in the limit of credit card must not serve as a convincing reason for you to change the way you would spend.

Stick to your spending patterns and maintain your credit profile. If you spend too much on your credit card, it works against you in multiple ways.

There are certain rules which you have to abide by to reap its benefits.

First, you have to repay all the money outstanding. If you fail to pay all your credit card outstanding, you end up paying interest. Second, failure to repay on time pulls down your credit score. Third is the credit utilization ratio. It simply means how much credit is availed by you as against how much is offered to you.

For example, if your card limit is Rs 100,000 and you spend Rs 80,000 on this card, then in that case your credit utilization ratio stands at 80 percent. High credit utilisation ratio, say more than 30 percent is not a good indicator for most credit bureaus. Consistently high credit utilization ratio pulls down the CIBIL score. So, to put it simply you should not be worried about such increase in credit limit on your credit card. Instead, be a judicious user of the increased credit limit. It is an additional leeway offered by the bank; use it to your advantage to pay for your bills or shopping without getting into a debt trap.

Also keep a track of your credit utilisation ratio. Do not fall prey to the baseless rumors about the CIBIL score. A good score is built over a period of time and can be protected at an attractive level of 750 and above, by being judicious with your use of credit.

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