Having a higher Credit Card limit can help you in case of sudden financial emergencies, but in some situations, lowering your credit limit may be a good idea.
If you got yourself a Credit Card when you just started working, chances are that over the years as your expenses and income have increased, the original credit limit on your Credit Card may not seem enough. Usually, for most Credit Cards, the credit limit is either two or four times the cardholder’s monthly income. Sometimes, in order to meet your increasing financial commitments, it may be a good idea to increase your credit limit, but there could also be situations when reducing your credit limit could make a lot of sense.
What Is A Credit Limit?
The credit limit, or credit ceiling, is the maximum amount that you can borrow on a Credit Card. Other than student cards which come with standard credit limits or cards for high net worth individuals that have no credit limits at all, most Credit Cards have credit limits that that are either two or four times the cardholder’s monthly income.
Additional Reading: Can Credit Card Companies Reduce Your Credit Limit Without Warning?
Examples of situations where it might be a good idea to reduce your credit limit are:
#1: When You’re Giving A Supplementary Card To Your Child:
If you’re thinking of giving a supplementary card to your child, it might be a good idea to reduce the credit limit on your card especially if your child has no prior experience of managing a Credit Card. For instance, if you have a monthly income of Rs. 50,000 and the credit limit on your card are Rs. 2, 00,000, your teen can possibly buy an entire library of his/her favourite games and a Gucci bag.
In fact, this is a good way to test your kid’s financial management skills. See how well they manage the Credit Card with the reduced credit limit and upgrade it only when you’re confident that they will be able to handle it like a mature adult.
Additional Reading: Do You Know Your Partner’s Credit Score?
#2: To Lower Damage Caused By Identity Theft Or Credit Card Fraud:
Having a low credit limit on your Credit Card helps to limit the damage that a Credit Card fraud or identity theft can cause to your financial standing. If the bank holds you liable for a Credit Card theft, you may have to pay bills that are up to four times your monthly income. You may consider lowering the limit on your Credit Card in situations where Credit Card theft poses a real risk-like when you’re travelling abroad or shopping on a new website just in case it turns out to be a scam.
Additional Reading: What Is A Credit Freeze? Things You Should Know Before Opting For One
#3: When You Need Help Budgeting:
If you have a habit of not paying your Credit Card debt in full, lowering your credit limit is another smart way to deal with pending Credit Card bills. Lowering your Credit Card limit will put brakes on your spending and help you pay off your Credit Card debt in a more planned way. Should you need to borrow at all, you can take out a Personal Loan. Personal Loan interest rates are much cheaper as compared to Credit Cards.
Will Lowering Your Credit Limit Tank Your Credit Score?
While your credit utilisation ratio plays a significant role in determining your Credit Score, lowering your credit limit won’t really affect your Credit Score as long as you maintain financial discipline. Use your Credit Cards only as a mode of payment and not as a source of credit. Ensure that you don’t let your Credit Card debt accumulate and make a practice out of repaying the balance in full every month so you get to enjoy cashback and rewards without paying interest.
In urgent need of funds? Explore Personal Loans with rates starting at just 10.99%.