A credit limit comes into picture the moment you apply for a credit card. It essentially is a ceiling up to which you can make purchases or swipe your card. First time around your income and credit history play a vital role in deciding the limit for your card. But with regular usage and repayment, credit card companies will most probably increase your credit card limit. Does it add value to run on a high limit for all your credit cards? Here are some reasons why it does.
- Efficient Utilization of Credit
A higher limit on a credit card would mean that you are utilizing only a small chunk of it month after month. This translates into better utilization of your credit limits and in turn impacts your credit score positively. You should try your best to keep the credit utilization to less than 30% of the total credit limit as it will boost up your credit score. Lower utilization of the credit limit gives creditors the confidence that you will be able to repay all your dues as opposed to running on 80-90% of credit limit every month. But the trick is not to go on a shopping spree just because you have a higher limit at hand.
- Better Rewards
It is no secret that there is a host of credit cards to choose from when you are looking for one. A large bucket to choose from essentially gives you the opportunity to pick a card that suits your kind of spending. For an instance, if you fly frequently a credit card with better rewards on frequent flyers would be apt for you. On the other hand, if you are someone who likes to shop or dine a lot, you can find cards that suit these needs. A credit card with higher limit will often give you access to a better reward system.
Well, you don’t necessarily become a friend to a credit card company, but a higher limit on your credit card and proper utilization opens an avenue for the addition of another card. As mentioned earlier, if you stick to a 30% utilization on your credit card it would most probably lead to a good credit score. A good credit score in return would give the lenders more confidence in you to provide fresh credits should you need one.
Also, if you maintain your credit limits properly, loan applications in future also become relatively easier for you. This is because you would have established a good track record of managing your funds and repaying any due amount on time.
When it comes to finances, most of the experts suggest having rainy day funds totaling up to expenses of 5 or 6 months. It can be a bit difficult to set aside that sum of money, given a host of other responsibilities that one must take care of. A credit card with higher credit limit comes to rescue in such situations. But one must deal with the situation with a lot of caution. Yes, you do have access to higher credit limits, but spending only on relevant and important things is crucial. Otherwise, you would get into an unwanted debt cycle.
Using your credit card judiciously will lead to maintaining a good credit score which is essential for a variety of reasons. Having a higher limit on one or all your credit card will do more good than damage if you have learned the art of not overspending. If you haven’t already increased your credit limit, now might be a good time to do so.
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