I travel frequently and as a rule of thumb I generally put my expenditure on my credit card because it's easy to keep track of my expenses when it's from one account. Credit cards are a part of our lives and it's a great tool for multiple reasons.
However, a low limit credit card can be limiting in many ways. Especially if you are trying to build your credit score.
I learnt it the hard way because even as much as I love using a credit card and pay back way before the due date my credit score was a couple of points lower than where I expected it to be when I checked my score.
It was then I realised that if you use up more than a sufficient percentage of your credit limit, it is likely to affect your score. Even if you have the capability to pay your credit card debt on time.
Here's a few reasons why it's important to negotiate a higher limit on your credit card when you apply for it with your banker. Don't be apprehensive because of the fear of falling into the debt-trap but instead be smart about your finances and get a higher limit in order to improve your credit score.
- Higher credit score actually requires you to use up under 30%-35% of your total credit limit. For example you have a credit card with a 1 Lakh credit limit, it means you should ideally utilise under 35,000 of it in a month. That's a fair amount for most people. But if you put a majority of your spending on your card to reap the benefits of having a card you will soon realise that this isn't enough.
Credit bureaus such as CIBIL consider your credit utilisation ratio. Breaching 30%-35% of your ratio shows to them that you are hungry for credit and are likely to default on your credit. This might not be true but this is their assumption nevertheless and there isn't a lot you can do about it.
It's always a great idea to use a credit card for a brief amount of time and then request a higher limit on it immediately. I didn't do that for the longest period of time even as I needed to use 2-3 times the limit in a month when traveling abroad where I would simply reload my card and use.
My credit score was briefly affected unnecessarily even as I've never never made a late payment. I've always paid in full usually a couple of days after the statement is received which is way before the due date in all the years of owning a credit card.
However I've changed my spending behaviour and have also since then requested for a higher limit. Which makes it easier to manage my credit score.
Multiple cards help - you can spread your monthly expenses across multiple cards and keep your credit utilisation ratio under 35% on each of these cards. It's alright to reload them as they reach this figure and continue your spending.
Good repayment history gets you a good pre-approved loan against credit card. Not only that it also sometimes can get you a good pre-approved loan from your bank for your housing on vehicular needs. Good repayment history tells credit agencies that you are capable of clearing your debt. A higher limit allows you to stay below the 35% mark and good repayment history opens up newer doors for you.
Higher limit can help you during a financial crisis. You might not have sufficient balance in your bank but a credit card with a high limit might bail you out in an emergency and you will have sufficient time to collect the funds and repay the bank. In many cases we are able to convert our purchases or spends to EMIs further assisting us during repayment.
If you haven't spoken to your bank about increasing your limit then now is a good time. Just because you have a higher limit doesn't mean you can spend more. It allows you to build and retain a CIBIL score of above 800 points.
Be careful with your financial planning and take advantages of all the financial tools available to us in the times we live in. Build a credit score from a young age goes a long way in helping you achieve your long term goals.
Good luck.
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