Is a higher credit card limit a boon or a trap?

Credit cards are a great financial product as they offer the needed financial freedom to many. With this in your pocket, you can spend freely. Moreover, you can get a 30 to 45 days interest-free period, so paying off bills will be easy. Other than that, it helps boost your credit profile in the process. So credit cards are advantageous if and when used right.

Now, credit cards do not come with an unlimited spending limit. There is a limit of credit card, and you are allowed to spend till that limit unless you have an overdraft facility. You can then extend this credit limit depending on your usage. However, the question is, whether extending this limit is a good idea or not.

Let’s unravel.

The good side of extending the limit of a credit card

Here are the advantages of extending the credit limit of a credit card –

Additional purchasing power

With a higher credit limit, your purchasing power will increase significantly. It is one of the most significant benefits of extending this limit. You can now get the 4K TV you want but without spending the cash in hand. Using a credit card will help you complete big-ticket purchases, so you can pay for it later. Moreover, no interest is applicable to the purchase if you made the purchase during the interest free period.

Meeting financial emergencies

Unexpected financial needs can come up at any time. Now, having a credit card with a higher limit will help you meet these expenses without any worry. Moreover, you will get ample time to repay the amount or you can convert it into EMIs to make it even more affordable.

Boosting credit profile

One of the main advantages of extending the limit of credit cards is that it will help you improve your credit profile without any hassle. Since you will have a bigger credit limit, it will bring down your credit utilisation ratio. This means even if you spend more than before, your credit utilisation ratio will remain in control and positively affect your credit score.

Here is an example for a better explanation. Previously you had a credit card limit of Rs. 50,000, and you have spent Rs. 25,000. This means your current credit utilisation ratio is 50%. However, now that you have a credit limit of Rs. 1 Lakh, spending Rs. 25,000 means this ratio is 25%.

Induces confidence

Once you learn to manage the higher credit limit better, it will induce confidence in you. You will also be better prepared for the future loans that you will take and be responsible enough to pay them off on time. Overall it will improve your profile as a borrower.

The bad side of an extended credit limit

Having a higher credit limit is not always beneficial; here is why –

More debt

Credit card is like a short-term loan and taking up a higher debt is never a good idea. With an extended credit limit, you are likely to spend more and thus accumulate a bigger outstanding, which, if not managed, can lead to greater financial troubles.

Higher interest rates and additional charges

As you already know, failure to pay minimum amount due in credit card on time accumulates interest on the outstanding. With a higher credit limit, this rate of interest and the penalty charges will also increase, and this add-up to your existing debt.

Potential debt trap

A considerable debt amount along with a higher interest rate, means your overall outstanding will rise. And in such situation, you need to control it by making payments on time. If not managed, this bigger credit limit could soon turn into a debt trap.

Damages your profile as a borrower

Just like the clever use of a credit card can improve your profile as a borrower, being reckless can also damage it. If you get into a debt trap owing to a higher credit limit, it will destroy your credit score.

So if you are wondering how to get a credit card and increase its credit limit, consider the above pointers and decide.

Also Read: What is Convenience Fee

Parting thoughts

Whether a higher limit of credit cards will be a boon or a trap will entirely depend on you, the user. If you can be clever with its usage, and pay the dues diligently, you can make the most of this extended financial freedom. 

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