Planning Some Big Purchases? 4 Benefits Of Increasing Your Credit Limit

Now, shopping for festivals or weddings can be an expensive affair and you must be careful that this doesn't affect your credit score

A higher credit limit with a lower utilisation ratio can help you improve your credit score.

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The concluding months of every year are synonymous with the excitement of festive as well as the wedding season. With shopping being a big part of both occasions, managing your expenses during this time may sometimes pose to be a challenge. And, while saving up for these occasions can be helpful, you may sometimes have to rely on other sources such as credit cards.

Now, shopping for festivals or weddings can be an expensive affair and you must be careful that this doesn't affect your credit score. One effective strategy to ensure this is to increase your credit card limit before undertaking these expenses. Increasing your credit limit as your financial needs change is advisable and often necessary to take care of bigger expenses that may come your way. Let’s look at some of the key benefits of having an increased credit limit!

Improved Credit Utilisation Ratio

Your credit utilisation ratio (CUR) is a key factor in the assessment of your credit score. It represents the percentage of your total available credit that you are using at any given time and should ideally be under 30 per cent. A higher credit limit can help you lower your CUR, especially if your spending stays the same. Let's understand this with an example.

You have recently had your credit card limit is increased from Rs 1.5 lakh to Rs 2 lakh. Meanwhile, your monthly expenses have remained stable at Rs 50,000. So, when your credit limit was Rs 1,50,000, your CUR was 33 per cent. But when you increase your limit to Rs 2,00,000, your CUR will drop to 25 per cent and this reduction can positively impact your credit score, improving your creditworthiness.

Scenario	Credit Limit	Monthly Spending	Credit Utilisation Ratio
Before Increase	Rs 1,50,000	Rs 50,000	33 per cent
After Increase	Rs 2,00,000	Rs 50,000	25 per cent

Enhanced Flexibility

Be it festivals or weddings, unexpected expenses can come at any time. Having the flexibility of additional funds at your disposal during such times can reduce the stress of scrambling to arrange money.

Reward Maximisation

If your credit card has a rewards programme, increasing its limit may also provide you increased rewards. A higher spending limit means you can charge higher amounts to your card, which can potentially earn you more points, travel miles, or higher cash back. For instance, if you are planning a big purchase like an appliance or an international trip, charging these expenses to your card may help you accumulate significant rewards which can be redeemed for future savings or travel upgrades. 

Higher Credit Score

A higher credit limit with a lower utilisation ratio can help you improve your credit score. This can make approvals for fresh credit easier and also help you qualify for lower rates on loans. Lower rates on loans, especially long-term ones like home loans, can help you save significantly in the long run.

A higher credit limit has many benefits, but only when it is used responsibly. Avoid overspending with your higher limit, maintain a low CUR, and pay your bills on time to ensure you get the most of your credit card.

The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.