Increasing Your Credit Limit: 5 Dangers
We are all aware that credit cards come with a credit limit, and that abusing the limit may make or ruin the cardholder’s financial rating. The credit limit is the maximum amount of funds that an issuing bank will allow cardholders to borrow on a credit card.
The amount of your credit limit can be increased based on your credit rating. Banks tend to be more than willing to increase the credit limits of customers who have healthy credit ratings.
If you receive an offer to increase your credit limit in your mail by your bank, don’t be too eager to accept it. It is good to know that you have proven yourself to be a “risk-worthy” customer and are awarded with an increased spending power. However, think twice before you accept the enticing offer.
Here are 5 dangers of credit limit increase you should take note of:
1. Risk of Overspending
Cardholders should be aware that a credit limit increase comes with a drawback. Cardholders will be tempted to spend more than they ordinarily would, which means owing more money to the bank. If a huge balance is carried over, a high interest will be charged. Hence, it is essential to ensure that you spend only what you can afford to pay back, to avoid being trapped in an endless cycle of debt.
2. Limited Loan Availability
Having an increase in your credit card limit can be a disadvantage. Your loan application such as that for a mortgage can be hampered by a credit card limit increase, because you are considered as a “high limit borrower” from the bank’s point of view. This will affect a loan grant from the bank and ruin your dreams of owning a new home or car.
3. Higher Interest Fees
Increasing your credit limit also increases the chances of you not being able to pay your bill in full. This means that you have to pay more interest to the issuing bank.
4. False Sense of Security
Getting an increase in your credit limit may give you the impression that you can pay for any big-ticket items, like a home entertainment system or a home improvement project, at any time. While it is undeniable that you may feel financially secure as your credit limit increases, it is also true that your sense of security may be thwarted if you don’t monitor your spending strictly. Don’t be sucked into a vicious cycle of debt.
5. Higher Outgoings vs Income
The higher your credit limit, the more you’ll be tempted to purchase more expensive items. This results in higher monthly bills. If you fail to pay them off completely, carrying over a high balance may lead to higher interest charges. This could leave you in a situation in which you have to channel a large portion of your salary to pay off your bills, leaving you with little or even nothing for other expenses, including savings.
As you can see, an increase in credit limit may come with a price. It is imperative to take control of your expenses, track your monthly spending and have the right credit limit on your card to avoid the debt trap. Use your credit card to your advantage and be informed of the risks of credit limit increase before you decide to take up that tempting offer from your credit card provider.
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