Credit cards come with a limit attached to them. This limit is very crucial from consumer’s point of view. Most of the individuals are more than willing to increase their credit limit given a chance. Banks calculate your credit limit taking into various factors like your monthly income, your expenses and your repayment track record. Banks usually increases your credit limit depending upon your past repayment behavior and change in income. Let us look at pros and cons of increase credit limit and its impact on cibil score –
- Lower credit utilization – A higher credit limit on your card will result in lower credit utilization rate on your credit card. A lower credit utilization will result in better cibil score as credit utilization rate is a major portion of cibil score calculation.
- No need for for multiple cards – With one card of higher credit limit, you would not need multiple credit cards to manage from your own end. It will also save you from extra efforts to manage those cards.
- Helpful in financial emergencies – in case of financial emergencies like sudden medical expenses a credit card with higher credit limit would always come handy. You need not rely on your relatives or friends in case of emergency with credit card of higher limit.
- Better rewards – Banks tend to reward their higher limit credit card holders with better rewards compared to lower limit credit holders. So you can expect better deals on online shopping or movies next time with higher limit credit card.
- Reckless spending – A higher credit limit is a dream come true for most of the borrowers and it may result in unwanted shopping spree from a borrower on things that he may not have bought without higher credit limit. This reckless spending would negatively impact your cibil score due to higher credit utilization ratio.
- Security risk – In case of fraud or theft of credit card, damage to the owner could be pretty high compared to card with lower credit limit.
- Higher interest – A higher credit limit would result in higher credit expenditure which is more than what customer can afford to repay. Once, customer is unable to pay in current cycle, balance is carried forward to next cycle and you are liable to pay interest on it. This late payment may result in wrong habits and it would impact your cibil score negatively.
As, we can infer from above mentioned points that higher credit limit is good only for responsible buyers and for reckless buyers it would directly impact their cibil score and would increase their interest charges. Cibil score is between 300 and 900, you should always strive to maintain a cibil score of above 750 for better credit opportunities. You should make sure that higher credit limit doesn’t impact your cibil score adversely at any time.