Benefits of Increasing Your Credit Card Limit
There is a myth about increasing the limit of your credit cards. Contrary to popular belief that increasing your credit limit on the card can decrease your credit rating, it actually increases your credit rating. Nevertheless, think before you increase the limit. If you think you are a person who would use up the extra limit needlessly then I advice you to abstain from doing so. For those responsible spenders out there, to find out more on the benefits of increasing your credit limit read on.
How increasing your credit limit actually improves your credit score: As per the credit card rating mechanism, your credit rating will decrease if you almost used up your entire limit. This, to the rating agency indicates that you are always invariably stretched to the limit. Increasing the limit actually allows you to spend whatever you are currently spending with the advantage of an available upper buffer. This enhances your credit rating. Let me illustrate this with an example. It you spend Rs.20,000 every month while your credit limit is Rs.22,000 per month, it means that you reach your limit every month. If you increase the limit to Rs.25,000 and continue spending Rs.20,000 your credit rating improves.
How it can act as an emergency fund: Suppose you have a sudden need to spend more when on a holiday, the enhanced credit limit will come in handy. With increasing rates of flight tickets, hospital bills and even education cost, an increased credit limit can prove to be very useful.
How it can increase your rewards: With most of the credit card companies giving reward points on your credit card purchases, the more you spend using the card the more the reward points you accumulate. In such a scenario, increasing the limit can help you accumulate more reward points. This helps you to have cheaper vacations, gifts, flight tickets (in case your card has a co-branding with an airlines), etc.
How it provides a margin of safety: For those who stick to their budget and are not overspending, increasing the limit on credit card can provide the extra cushion. If an expense does not fall into the budget and yet has to be carried out, the extra limit will act as a safety net to cover your situation. You can draw funds using the stretched limit on your card in times of need and till you repay the amount you have used up you have to pay the credit card interest which is lesser than the overdraft charges charged by banks.
How major purchases can be made efficiently: With an increased credit card limit you can make major purchases more efficiently. If you are only able to pay part of the major purchase using the card, you not only lose the reward points that get accumulated against your purchase but you also need to carry the cash. Most of the products come with additional warranty period or additional discount if the payment is made using a card. You may lose this added advantage if you do not have an enhanced limit.
All the above advantages mentioned help those who pay their credit card bills on time and are not over spenders. If you think an enhanced credit card limit gives you the right to spend more you are sadly mistaken. You must remember the golden rule: You have to pay for what you spend. Therefore do not use up the extra limit to buy products or services that you are not in need of. You have to stick to your budget and financial plans with exceptions as per the situations. Increasing the limit will prove helpful during these exceptional situations.