A higher limit on your Credit Card doesn’t just mean increased purchasing power. It is also an indicator of financial security. After all, the privilege of a higher Credit Card limit needs to be earned from your bank. This is only possible through financial discipline and a long-term record of repaying debts in a timely fashion.
What is a Credit Limit?
Credit limit refers to the maximum amount of money you can borrow from your bank using your Credit Card. This limit is determined by banks and lending institutions based on parameters such as the gross monthly salary, credit score, etc. of an individual.
Banks revise the credit limit from time to time depending on the financial situation and repayment track record of the Credit Card holder. Banks reward Credit Card holders with extended credit limits if they maintain healthy financial records.
Let’s look at some benefits of receiving a higher credit limit from your card provider.
How an increased credit limit helps
1. Lower credit utilisation: Higher credit limit helps you to reduce your credit utilisation ratio if used judiciously. For example, if you have a Credit Card with a limit of Rs. 50,000, and you utilise around Rs. 25,000 each month on average, then you are utilising half the available credit.
If your bank increases your credit limit to Rs. 75,000, and you keep your spending constant at Rs. 25,000, your credit utilisation ratio reduces to 33.33%. This way, you appear less loan-hungry to ratings agencies such as CIBIL, which take your credit utilisation into account while calculating your credit score.
2. Increases chances of getting better loan deals: Not everyone gets the benefit of a higher credit limit. A higher credit limit indicates that banks consider your financial health to be stable and secure. This puts you in a position to seek better loans and card deals for yourself.
3. Helpful in financial emergencies: A higher credit limit means higher purchasing power. A Credit Card with a high credit limit comes handy in times of financial emergencies without you having to borrow from friends. Credit Card debt can also be repaid in EMIs, making it a useful financial tool in any emergency where you’re short of cash. Not that you could also consider taking a Personal Loan if you’re eligible.
4. Higher rewards: A higher credit limit indicates that you are a valued cardholder and banks often reward their premium cardholders with special offers, reward points and added benefits. You can work with your bank to understand how your rewards can be maximised through the controlled use of your spending limit.
Additional Reading: The Pros And Cons Of Increasing The Credit Limit On Your Credit Card
A higher credit limit can prove to be a boon if used with wisdom and discipline. On the other hand, reckless spending can get you into a debt trap, so make sure you use your card responsibly.
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