Thinking about increasing your credit limit? Worried about how it will impact your CIBIL score? In this article we will cover just that! A credit limit is the maximum amount that a lender permits you to borrow on a credit card. Financial institutions take a number of factors into consideration when they set your limit. They will first look at your credit score, which is a numeric summary of your entire credit history. Looking at your CIBIL rating gives them a better idea of your repayment pattern and your ability to repay future credit. Credit card companies will also look at the outstanding credit made available to you through other credit cards. Getting a higher limit on your card does not automatically mean that you should be splurging beyond your means. Rather, you should be wise in handling credit which in turn will benefit you in a number of ways.
A credit score can be positively impacted when more credit is made available. One of the factors that contribute to your CIBIL rating is the credit utilization rate. The ratio of one’s credit card balance to the credit limit is termed as credit utilization. It shows how much credit a person is using. The lower the credit utilization ratio, the better will be your credit score. Likewise your CIBIL rating will be negatively affected when your credit utilization is high. If you decide to avail a higher credit limit and use all of it then your credit utilization will shoot up and tarnish your credit score. However, if you do not touch the newly availed credit then chances are that your CIBIL rating may improve. You could consider asking for a credit limit increase when your income has increased, when you hold a good credit score and when you do not have much debt. It is important to note that financial institutions can revise your limit from time to time according to your CIBIL rating, transactions etc.
One of the other benefits of having an increased credit limit is that you wouldn’t need to hold multiple cards from different credit card companies with lower limits. You would just need to keep track of a single card and use it as per your requirements. Another advantage of having a higher limit is that it can serve as an emergency cushion, provided that you are disciplined in handling finances. You can use it to pay for necessary car repairs, booking last minute tickets etc. The higher your limit, the more you will have at your disposal in case of emergencies. Additionally, higher credit limits make you more appealing to the credit card companies. Financial institutions offer added benefits to their premium cardholders. Keep in mind that credit card companies and other financial institutions want to see you maintain a high CIBIL rating and follow through your financial obligations.
There are downsides to have an increased limit on your card. This happens when you fail to strictly monitor your spending, which then hurts credit score. Often times when availing a higher credit limit, people start to believe that their CIBIL rating has gone up more than it actually has. This increases the chance that they will apply for new credit which again means more credit inquiries will be made on their credit report. Ultimately it leads to a drop in CIBIL rating rather than an increase. You can also run into the risk of increased debt and higher interest payment. Chances are that you may not be able to pay your bill in full when you have an increased credit limit. That again means you would have to pay more in interests to the credit card companies. Another drawback is that you can end up depending too heavily on credit cards.
Yes, a higher limit means that you have more credit at your disposal. Increasing your credit limit can be a good thing if you are financially disciplined. It can serve as your asset. On the other hand, if you are reckless then you can quickly fall into a debt trap. When credit card companies are letting you avail higher limits, make sure that you get every detail from them. Know the plus and minus points of handling a card. Be responsible with the way you treat credit limit increase. It can easily tarnish your credit score which will take time to build up.