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Go for that higher credit limit on offer..

Tuesday, March 18, 2014 by Rajiv Raj

cc131n31Getting a call from your bank offering an enhanced credit limit on your credit card is a good sign. First, it means you are a good customer who pays on time. Second, it offers some more headroom to spend money on credit. But the third is the most important point that most people are not aware of - it helps you build good Cibil credit score. Here is how it takes you there -

  • Low credit utilization: The moment you get higher credit limit, your credit utilization ratio goes down, which in turn helps you to improve your credit score. For example, assume that you spend Rs 50000 per month on your credit card that has a credit limit of Rs 1 lakh. Here the credit utilization ratio stands at 50%. If the credit limit is enhanced to Rs 1.5 lakh, and you keep your monthly spends constant, your credit utilization ratio falls to 33%. Low credit utilization against offered credit limits means you are in a good financial shape. If you can sustain credit utilization ratio at low levels, it surely helps in lifting your credit score, which is popularly known as CIBIL score in India.
  •  Better handling of emergency:  Higher credit limit on credit cards means you have some elbow room to spend. This comes to rescue when there is a financial emergency. Though most financial planners advise keeping at least six months of family expense in a fixed deposit to address such financial emergencies, not everyone can start his financial journey with adequate emergency fund. High credit limits can offer you some respite till the time you build your emergency funds. Even if you have an emergency fund in place, you may not reach it if you are travelling abroad, and in such situations a credit card can rescue you.
  • No need for multiple cards:  If one bank is willing to offer a credit limit that comfortably takes care of your monthly credit spends, there is no need to go to more banks asking for credit cards. For example, if you have one credit card with credit limit of Rs 5 lakh and you have monthly spends of Rs 50000, one such card is sufficient for you. Sticking to one card, helps in keeping a track of your spends, keeping that card in safe custody and more important - paying off the dues on time as you have only one date to remember.
  • More rewards: If the bank offers you higher credit limit, you may consider making some mandatory spends on credit cards,that you were earlier doing in cash or by using cheque. For example, payment of insurance premium and utility bills can be done using credit cards. You either get more reward points or you take home some cash back. Both ways you win.

Though higher credit limit on your credit card means you have more freedom, be careful with using credit. Spend within your means and pay off your credit card dues on time. If you can keep your credit utilization ratio low in addition to timely repayments, you get good credit score which in turn helps you to secure cheaper credit in future. Going overboard with high credit limits, however, is a prescription to poor credit score and poor financial health.

MadanRajiv Raj

Rajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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