India: Importance Of Having Higher Credit Limit On Your Credit Card!
I travel frequently and as a rule of thumb I generally put my expenditure on my credit card because it's easy to keep track of my expenses when it's from one account. Credit cards are a part of our lives and it's a great tool for multiple reasons.
However, a low limit credit card can be limiting in many ways. Especially if you are trying to build your credit score.
I learnt it the hard way because even as much as I love using a credit card and pay back way before the due date my credit score was a couple of points lower than where I expected it to be when I checked my score.
It was then I realised that if you use up more than a sufficient percentage of your credit limit, it is likely to affect your score. Even if you have the capability to pay your credit card debt on time.
Here's a few reasons why it's important to negotiate a higher limit on your credit card when you apply for it with your banker. Don't be apprehensive because of the fear of falling into the debt-trap but instead be smart about your finances and get a higher limit in order to improve your credit score.
- Higher credit score actually requires you to use up under 30%-35% of your total credit limit. For example you have a credit card with a 1 Lakh credit limit, it means you should ideally utilise under 35,000 of it in a month. That's a fair amount for most people. But if you put a majority of your spending on your card to reap the benefits of having a card you will soon realise that this isn't enough.
Credit bureaus such as CIBIL consider your credit utilisation ratio. Breaching 30%-35% of your ratio shows to them that you are hungry for credit and are likely to default on your credit. This might not be true but this is their assumption nevertheless and there isn't a lot you can do about it.
It's always a great idea to use a credit card for a brief amount of time and then request a higher limit on it immediately. I didn't do that for the longest period of time even as I needed to use 2-3 times the limit in a month when traveling abroad where I would simply reload my card and use.
My credit score was briefly affected unnecessarily even as I've never never made a late payment. I've always paid in full usually a couple of days after the statement is received which is way before the due date in all the years of owning a credit card.
However I've changed my spending behaviour and have also since then requested for a higher limit. Which makes it easier to manage my credit score.
Multiple cards help - you can spread your monthly expenses across multiple cards and keep your credit utilisation ratio under 35% on each of these cards. It's alright to reload them as they reach this figure and continue your spending.
Good repayment history gets you a good pre-approved loan against credit card. Not only that it also sometimes can get you a good pre-approved loan from your bank for your housing on vehicular needs. Good repayment history tells credit agencies that you are capable of clearing your debt. A higher limit allows you to stay below the 35% mark and good repayment history opens up newer doors for you.
Higher limit can help you during a financial crisis. You might not have sufficient balance in your bank but a credit card with a high limit might bail you out in an emergency and you will have sufficient time to collect the funds and repay the bank. In many cases we are able to convert our purchases or spends to EMIs further assisting us during repayment.
If you haven't spoken to your bank about increasing your limit then now is a good time. Just because you have a higher limit doesn't mean you can spend more. It allows you to build and retain a CIBIL score of above 800 points.
Be careful with your financial planning and take advantages of all the financial tools available to us in the times we live in. Build a credit score from a young age goes a long way in helping you achieve your long term goals.
Good luck.
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Read the post a the moment you put it out there but completely forgot to comment. Your posts are so good that I can't help myself but leave a comment :-)
Personally I never had to face the problem of credit limit on my card before. Frankly I never really ever owned a credit card before. Perhaps it was the influence of my dad, because he always disliked the idea of being in interest based debt. That energy has channeled into me and I have never been able to borrow money from bank in any form.
On the other hand I think I also understand why people think they might need to borrow from banks because most people don't have the support of family and friends who are willing to help in a financial crises. In a lot of other cases sometimes even the the loved ones don't have the means to help us. Whatever the case I do not judge in these matters because financial conditions can vary and I might have no idea what the other guy is going through.
Just wanted to thank you for always taking your time out to respond to my posts. I always read everything :)
Man its a pleasure for me to read all you work. Particularly the news that you have brought to the platform has helped me stay in touch with subcontinent's side of things.
Thanks for taking the time to read my replies because not everybody does it :-)
It was Today, I got a call from my banker. He was offering me the credit card and I refused. I haven’t used a credit card before. I don’t know whether it is good to keep a credit card as I think that credit cards only make us shopping addicts and we tend to spend more in the future.
But after reading this post, I think I can make up my mind to apply for it.
I never used Credit Cards because of always a fear over expenditure and not paying the payment on time. I know the reason is ridiculous but this is the reason. Though owning a CC has numerous advantage, again if you get the CC as per your spending pattern.
Do you ever read my comments in several post from you @firepower?
For me, true Credit Cards are not the real thing. The bank want people to take the loan from them. Buy this or that. Come and take the credit from us..... ha ha, what a madness from them to make us slaves for the money. The best way is not to use a credit card and just use a debit card. There is a lot of cards out there, and I never need a credit card, because my 6 debit cards are much enough for every single day in the past 2 years of constant travel.
Credit Card usage patterns differ from country to country. I've been using a CC since before my monthly income was anywhere remotely close to the meagre limit on my card at the time. 7-8 years later I've managed to come all the way without ever wanting to live above my means just because I own a credit card. :) Debit cards here don't necessarily have all the same advantages as a credit card. A smart saver and smart spender knows how to differentiate the two types and use both to their benefit. Btw, I do check every single comment on my posts and also upvote many of them regularly when I like something i see.
Oh yeah thanks for info dear @firepower
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A great tip and one I had not thought of. I have also noticed that maxing out one card is not good, even if you pay it off at the end. Appreciate your sharing your research and experience.
Nice post.
Interesting, I'll have to check to see if this is also the case in Australia
I have two credit cards and thats it. I have put my travel expenses in there so I see the point.