Anushka has a credit card with a limit of Rs. 100,000 which she applied for almost 5 years back when her monthly billing used to be around Rs. 25,000. Now her billing almost on an average is around Rs. 60,000. Anushka always pays her bills on time. Ankita has a credit limit of Rs. 50,000 and she mostly manages to max her credit limits and sometimes even struggles to make payments thus carrying them forward to the next billing cycle.
Who do think amongst the above two will benefit from getting a higher credit limit; if at all. I feel it will be Anushka while for Ankita it could be a bane. In case you are wondering why then follow the discussion below.
When is an Enhanced Credit Limit Beneficial?
As in the case of Anushka, often a person’s life style and expenses increase with time keeping in pace with increased income and also rising inflation. However often users forget to enhance their credit limit which is usually linked to a person’s income. Thus even if the person pays in time like Anushka does, their credit utilization ratio (billing per cycle/sanctioned limit) is high which impacts the CIBIL score negatively.
Thus for someone who iseligible for a higher credit limit, pays on time but has a high credit utilization limit getting an enhanced credit limit will be beneficial.
When the credit card billing ratio is high in comparison to the sanctioned limit, it has a negative impact on the CIBIL score. The solution to this could be either to reduce the monthly spending on the card (which might not be the easiest thing to do), get a new card issued which will raise the overall available limit and the expenditure must be spread over both cards and the third is the get a bigger limit sanctioned on the same card. If eligibility criteria allows then getting a bigger credit limit seems to be the simplest way to keep the credit utilization in check. Reducing the billing might not be possible and everyone might want to get a new card issued due to multiple reasons.
When is an Enhanced Credit Limit Not Such a Good Idea?
Considering the example of Ankita, a higher credit limit can compound the problem rather than mitigating the problem of a high credit utilization ratio for someone like her. Her problem is not only a high ratio of spending but spending beyond means and also not paying on time which is a bigger evil. So far someone like her it may lead to spending more than before causing her to be subjected to bigger penalties and more rollover credit. A situation like this can lead to a debt trap too. A bigger credit limit can be a big temptation for those who indulge in impulsive shopping and are generally not inclined to budget their expenditure. A smaller limit allows lesser option to splurge. Delayed payments and defaults impact the CIBIL score even more adversely than a high credit utilization ratio.
So if Ankita really wants to do something about her credit score the first thing she needs to do is control and budget her expenditure. Once that is done then she can go on to get a bigger credit limit if her credit utilization ratio is still high. Tackling the issue of payment default is a more important than credit utilization for her; just going on to get a bigger limit will not work for her. Moreover the card company might not be willing also to sanction her a bigger credit limit considering her past record.
Thus an enhanced credit limit must be opted when one’s credit card billing is within their paying capacity but the ratio is high in comparison to the sanctioned limit. Getting a bigger limit will help him/her in improving the credit score. However for someone who is already struggling with defaults and is frequently late in paying or resorts to paying only the minimum amount due a bigger limit may not be the best solution. So before applying for a bigger limit evaluate your credit card billing pattern and then decide accordingly.