When a bank, credit union, or online lender gives you a credit card or extends a credit line, they will set a Credit Limit. This limit is the maximum amount of money you can borrow from the lender in a given period of time. It is decided based on your income, credit score, and other factors.
If you have a good record with the lender and have made your repayments in a timely manner, they may consider revising your credit limit. You can also put in a request for the same.
Why should you do so? There are several advantages to raising your credit limit as long as you manage your money well. Read on for the top 6 benefits of raising your credit limit.
1. Lowers Your Credit Utilisation Ratio
Your credit score is a metric for your ability to pay back a borrowed amount. It is measured based on your credit history, income, credit utilisation, and other factors. Credit utilisation is the ratio of the amount of credit you have used to the total amount of credit available to you. If the ratio is too high, it shows a lender that you might be borrowing more money than you can payback. So, they may not approve you for a credit card or credit line.
Raising your credit limit increases the total amount of credit and thus, reduces your credit utilisation ratio. For instance, if you have a credit limit of Rs. 10,000 and spend Rs. 5,000, your credit utilisation is 50%. By raising your credit limit to Rs. 20,000, the ratio becomes 25%, which helps your credit score.
2. Improves Your Credit Score
Raising credit limits and lowering credit utilisation tend to improve your credit score. This in itself has many other advantages. A higher credit score shows you to be a trustworthy borrower and makes it easier for you to get approved for loans, instant credit lines, and credit cards. It can also help you get loans at lower interest rates.
3. Creates an Emergency Fund
When you raise your credit limit, it gives you easy access to extra funds. You may use up your entire credit for your everyday expenses. But, they may come in useful in an emergency. Whether you need to pay for a health procedure not covered by your insurance or make an urgent trip – having a credit limit that is over your spending amount gives you funds you can access in a pinch.
4. Allows You To Earn More Rewards
Having a higher credit limit also allows you to pay more of your expenses through your credit card or credit line. The more you use your credit card, the more rewards you can get from it. These rewards can be in the form of cashback, points, or air miles. This might help offset any of the fees you pay towards maintaining the credit card or instant credit line. Be sure to pay off your credit card balance on time to avoid incurring interest and extra charges.
5. Reduces the Number of Credit Cards
Having one credit source with a high credit limit is more cost-effective than having multiple credit cards with lower limits. It saves you money on any annual fees, late fees, and balance transfer fees you would pay for each card. It also saves you the time and effort it takes to manage expenses across multiple credit accounts. Moreover, having too many credit cards or credit lines reflects poorly on your credit history and lowers your credit score.
6. Gives More Safety While Buying High-Ticket Items
With a higher credit limit, you can make larger purchases from your credit card or credit line. This would come with a range of consumer protections such as extended warranties, price protection, and coverage for damaged or stolen items. This can come in handy in case you run into any problems with your purchase.
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