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The credit limit is the maximum amount of money or credit a lender extends to the customer. Typically, lenders such as banks and financial institutions set certain credit limits based on the information obtained from the customer.
A credit score is a critical measure used by lenders to assess your repayment capacity. Credit limits influence customers’ credit ratings and their capacity to receive additional credit. Extending your credit limit can help you manage your credit more effectively, eventually boosting your credit score.
You have a greater chance of getting accepted for a mortgage with low-interest rates if you can increase your credit score. Visit this page to learn how a good credit score can help you find an affordable mortgage.
It can be challenging to figure out the average credit limit for an individual. However, a survey from the Bank of Canada reveals that 41% of Canadians have a credit limit of more than $10,000, and 15% have a credit limit of less than $2,000.
Which Is Better – A High Or A Low Credit Limit?
Is it good to increase your credit limit? Suppose you have a medical emergency or a plan to buy the latest iPhone, but your credit limit won’t let you. Here is when having a high credit limit comes to your rescue.
Having a higher credit limit than your monthly earnings is usually good. A lower credit limit might help you avoid overspending, but your credit score may suffer if you use it for a lump sum purchase. As a general rule, it is advised that you should not use more than 30% of your credit limit.
How Is The Credit Limit Calculated?
Banks calculate your credit limit by considering multiple factors like your income, debt, credit score, length of credit history, purchasing habits, and more.
That said, your credit score is possibly the most critical parameter in determining your credit limit. An individual with a good credit score is a low-risk bet for banks. They get more credit because they are more likely to clear their debts on time.
Benefits of Improving Your Credit Limit
Is it good to accept a credit limit increase? Here are six ways a higher credit limit can benefit you:
More Purchasing Power
Having a greater credit limit gives you the freedom to go on a shopping spree. For example, it’s Christmas time, and you’re considering buying yourself the latest MacBook or organizing a big-ticket foreign trip for your family.
Most people do not want to spend all their hard-earned money on such large purchases. With a larger credit limit, you may put the entire transaction on the credit card that will help you manage such expenses easily.
Lowers Your Credit Utilization
Credit utilization is the percentage of the total credit limit you have used. It is considered one of the most critical factors in evaluating your credit scores. Your credit score will improve if you utilize less credit.
A higher credit utilization rate sends a risk signal to lenders that you might have difficulties paying your bills on time. Experts advise always keeping your credit usage below 30% of the total credit limit.
Avail of Easy And Affordable Loans
Having a high credit limit demonstrates to lenders that you can manage finances. Lenders typically classify individuals with a large credit limit into a lower risk category, making it easier for them to get their hands on additional credit.
Moreover, a higher credit limit can boost your credit score, which improves the chances of getting approved for a personal loan or mortgage at low-interest rates.
Funds For A Rainy Day
Life is unpredictable. A medical emergency in your family, damage to your property, and other expenses may arise for which you did not have a budget. Having a high credit limit might be beneficial in times of need.
Also, a large credit limit will help you obtain a loan from any bank quickly and at a low-interest rate.
Boosts Your Credit Score
Lenders consider cardholders who use less than their allotted credit to be safe and responsible because they aren’t spending more than they can. This helps to boost their credit scores eventually.
When you increase your credit limit and at the same time manage expenses efficiently, you might end up utilizing less credit.
Earn More Rewards
Credit cardholders with a higher limit can spend more on their cards, which helps them earn rewards like cash back or travel miles. If the lender increases your credit limit, it signifies that the lender sees you as valuable and may reward you with more points and privileges.
Best Practices To Increase Your Credit Limit
The following four techniques can go a long way in increasing your credit limit:
Never Delay Payments
You always need to clear the dues on or before the due date. When you don’t pay your debts on time, you hurt your reputation with the bank. If you’re not good at remembering due dates, a simple solution would be to set the auto-debit feature for all your payments.
Transfer All Limits To Your Credit Card
Many national banks and lenders allow the transfer of limits between credit cards, short-term credit lines, pre-approved loan limits, and overdrafts. All these help you increase your credit limit.
Update And Verify Income Regularly
One of the most critical factors lenders consider when calculating the credit limit is your earning potential and capacity to repay debts on time. Whether you received a pay raise or started a side hustle for passive income, provide proof to the lender to increase your credit limit.
Reduce Financial Obligations
When you apply for a credit card limit increase, lenders will almost always consider the amount of debt you already owe, like a personal loan or a mortgage. It’d be wise to minimize the fixed dues you pay every month before requesting a credit limit increase.
So, is it good to increase your credit limit?
As discussed in this article, it is beneficial to increase your credit limit. That said, use credit wisely and take control of your finances. Having a higher credit limit comes with great responsibility. The way you use your credit limit must be strategic and intelligent since it gives you a tempting opportunity to increase debt. It is essential to keep track of your transactions and monitor your credit limits regularly.
You may also like: 5 Ways You Can Improve Your Credit Score
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