Due Diligence. Should you increase your credit limit?

“You are eligible for increasing your credit limit on your credit card for free”. This is a message that would have been flashing on your message box if you are a prudent credit-card user. This is an automatic route through which card providers offer an increase in credit limit to customers. An individual can reply to the message and get the limit increased.

Apart from this, you can increase your limit by sending a mail to the respective card provider. You have to provide certain documents such as previous year’s income-tax return, Form 16 of the last two years, last two or three months’ salary slips, along with bank statements. The soft copy of these documents can be attached to the mail, along with a request for increasing the credit limit. The limit will be increased based on your income level and after validating the documents.

Getting a higher credit limit is fairly easy, but should you go for it?

Handy sum

A higher limit can come in handy if you foresee a huge expenditure in the near term; for instance, if you intend buying a big-ticket consumer durable item or spending huge sums at one go during festivals or weddings. A credit card with a higher limit is the best option in such situations, as it can provide interest-free loans, though for a short period.

A higher credit limit can also act as a contingency fund, that can be used in emergencies.

But make sure to repay within the prescribed time to avoid higher interest cost. Converting such one-time spending into an equated monthly instalment (EMI) option is also a better idea rather than not repaying or going for a minimum amount payment.

Discipline, the key

With increased credit limit, you may be tempted to incur unnecessary expenditure. So, unless you are confident about being disciplined, don’t accept the offer.

Try to keep the utilisation rate under 50 per cent, after accepting the higher limit. This will ensure that you don’t go overboard with your spending.

Anuj Kacker, COO and Co-Founder, MoneyTap, a fintech that offers app-based credit line, says, “Enhancing the credit limit should be done carefully because you may be tempted to spend more. Go for it only if you can manage your spending properly.”

“Increase your credit limit only for convenience and not for necessity; this will protect you from falling into a debt trap,” says Ranjith Punja, CEO and Co-Founder, CreditMantri. He also adds that one should ideally restrict the usage to 30-40 per cent of the credit to have a positive impact on the credit score.

If you are not comfortable with increasing the limit but want a higher credit line, you have other options. Go for multiple credit cards with lower credit limit in each. This will also mitigate the security risk associated with having a single card with high limit. Vikas Kumar, Co-Founder, Loantap, a fintech providing personal loans to salaried professionals, says, “There is a risk of having a higher limit on one card. If the card is lost, the entire limit is under threat. So, considering the security aspects, I would prefer to have two or three cards with lower limits or take an overdraft facility in case of an emergency.” Having multiple cards also has its own advantage of offering different rewards in each card, which a single card with higher limit cannot fetch.

To sum it up, increase your credit limit only if you can plan and manage the incremental spending.

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