Rajiv Raj of Creditvidya.com | Retrieved on 6th Apr 2015 | Moneycontrol.com
There is no harm in getting your credit card limits enhanced. However, do not overspend just because you have scope to spend. Keep a tab on credit utilisation ratio.
Is your credit card company increasing you card limit without your request? Were you anyway planning to approach the company for an enhanced limit? Are you confused as to whether it’s a good idea to do so? Will it hurt your Cibil credit score? Well, the good news is that it’s two fold. It is a good idea but only if you can resist temptation.
Many a times we are unsure if we should feel happy and flattered when our credit card limits are raised. People become skeptical when it happens, wondering if it may affect their Cibil score in the long run. On the flip side there are times when you may want to increase the card limit. This also means you are exposing yourself to more debt and this calls for an evaluation. Here are some insights which will help decide what’s best suited for you.
Enhanced Card Limits:
This primarily means you have prepared to take on more debt. The good news is that you have money available at your disposal. But, it also exposes you to more debt. If the idea of going in for an enhanced limit is triggered by a cash crunch situation then it is your red flag. Another red flag would be if the credit card is being used to make ends meet every month. That would indeed be a dangerous financial situation. It is an indicator of poorly managed cash flow and that must be corrected. Enhancing credit card limits in such situations would be equivalent to sinking deeper while already in a quicksand.
Reading this, if you are already adding enhancing credit card limit to the list of vices to stay away from, then stop. It can actually be a smart move if it is well planned and the implications fully understood before going in for it. Foreseeing a big ticket expense like a vacation, educational fees, home renovations etc is a good reason for enhancing your card limits.
Benefits of enhanced limits:
Enhanced card limits will help accommodate occasional expenses. It will also entitle you to reward points and cash back offers which help to save money while benefitting from the purchase. Also, if you are aware of a large expense coming up, swiping the card for a higher amount without raising the credit limit may affect the credit utilization ratio. This move may negatively impact your Cibil score. Hence, it would be wise to get enhanced limits approved beforehand.
Be aware of the flipside of enhanced limits:
Too much debt can be risky. The temptation to spend more than you would otherwise do will remain looming over you all the time. Resisting that may not be as easy as one may envisage. This can potentially be a trigger to take on more debt than your finances would handle at that moment. Lenders generally look at the total credit amount you have access to, before sanctioning loans. Enhanced limits may have a negative impact during such an analysis. While applying for loans for an important purpose like buying a home, education, vehicle, etc this may prove to be factor which will stop from qualifying you for a higher loan amount.
Planned utilization is the key:
Before buying a car, we check if the maintenance cost is reasonable and something we can afford. The same rule holds true for enhanced limits. Affordability of repayments needs to be checked. It can be done by working out a repayment plan beforehand. Interest rates on credit cards, as we know it are high. If you are already in a cash crunch situation, paying interest on credit card money will make it worse. Even for big ticket purchases, one of the valid reasons to enhance card limits, saving and repayment planning has to be initiated before making the purchase. The idea is to reap benefits of an additional security cover and enjoy reward points and cash back offers.
Impact on Cibil score:
As long as you keep an eye on the utilization amount, an enhanced card limit will impact the Cibil score positively. Utilization ratio impacts your Cibil score inversely. The lower the utilization ratio, the better your Cibil credit score. Needless to say this will work only if you can resist the urge to spend more inspite of having a higher credit limit. A lower utilization ratio is read by the lenders as less risky and disciplined financial behavior. An enhanced credit limit can positively impact the utilization ratio.
However, deferred and irregular credit card repayments, are detrimental for the credit scores. So, spending more and increasing debt while on an enhanced limit is not good news for your score. One must also bear in mind that a poor Cibil score, lowers chances of getting a good credit deal elsewhere as well.
Getting the limits enhanced:
Most credit card companies track the financial behavior of their clients and offer enhanced limits accordingly. Before you decide to approach the company for an enhancement give it some time, at least six months. Most companies will offer an enhancement themselves after tracking the card for six months. Also, considering you have decided to go in for the increase after reading the points above, present a strong case while requesting an enhanced limit. Regular repayment pattern, not maxing out the card limit etc are points which show financial discipline and will encourage the lender to give a positive response to your request. As long as you are in good standing, enhanced card limit requests are generally approved.
There is no harm in getting your credit card limits enhanced. Having said that, the points mentioned in this article need to be considered carefully before going in for it. And the last piece of advice would be to ask yourself if you really need it. If not, don’t go in for it. Do not change your spending habits just because you have the capacity to do so.
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