Should you accept a credit card limit increase? Pros, cons and key factors

Credit cards have become an essential and convenient financial tool nowadays, offering flexibility when making purchases. At times, when carrying cash is cumbersome and risky, a credit card becomes a saviour for expensive purchases.

6 reasons to accept an increase in credit card limit

Credit card companies often offer to extend the credit limit, allowing their customer's to spend more. Listed below are 4 reasons to increase your card limit.

• Lowers credit utilisation ratio: The credit utilisation ratio, which is indirectly related to higher credit limits, increases with card use for major purchases. This suggests that the only way to lower the credit utilisation ratio is to increase the card limit or limit spending habits.

Improves credit score: Since the credit utilisation ratio influences the credit score, one can improve it by increasing the credit card limit. When the limit is higher, debt decreases relatively, helping maintain a good credit score and making it easier to secure loans. Hence, an improvement in credit score through a limit increase improves the chances of quick approval for a house or car loan. Banks prioritise disciplined and financially responsible customers who manage their income and expenses prudently, as this reassures them that they will repay their loans and Credit Card bills on time.

• Acts as a safeguard against financial emergencies: Since emergencies come unannounced, a credit card with an extended limit serves as a safeguard in cash-crunch situations.
• Limit extension is better than getting a new credit card: It is always better to extend the credit card limit than get a new card issued, as the existing card will have a better credit score than a new one because of limited credit history.
• Provides more financial flexibility: By increasing the credit card limit, one can make larger purchases or cover unexpected expenses. Hence, an increase in the card limit provides financial flexibility.
• Increased access to better rewards programs: An increase in credit card limits will open doors not only to a larger number of reward programs but also to better opportunities to save money.

6 key factors to consider before accepting a credit card limit increase

1. Current financial situation, such as income, expenses and debts

2. Credit utilisation ratio and credit score

3. Spending habits

4. Future financial goals

5. Credit card interest rate and fees

6. Creditworthiness

Disadvantages of raising credit card limit

1. Promotes overspending

2. Attracts a penalty in case of late payment

3. Can cause financial difficulties due to debt burden

4. Push one into a debt trap