Can higher credit limit boost your credit score?
Mr. John is an IT officer. He spends almost $2500 (Credit card limit $3000) in his credit card every month and he also pays off the credit card bill in full every month on time. But still he faced challenges while applying for a home loan as his credit score was not satisfactory. Do you want to know the reason? Because as per information given by FICO, 30% weightage is given to credit utilization ratio while calculating overall credit score. FICO credit scores are well accepted in most of the banks in United States.
Here, in this case, you can see that Mr. John has used more than 80% of his credit limit most of the time. It implies that he is at the risk of exhausting his credit limit every time and may be in trouble while clearing his debt. While calculating credit score, high credit utilization of credit limit indicates lower score. In this case, if Mr. John increases his credit limit but spends the same then his credit score will improve in near future. For instance, if credit limit is raised to $9000 then his credit utilization ratio will be only 27%. However, credit utilization ratios lower than 20% is preferable.
So, apparently it seems like that higher credit limit is always good but it’s not so. Higher credit limit has both its pros and cons. Let me explain these in details.
Advantages of having higher credit limit
1. Better credit score:
As I was discussing a higher credit limit will lower your credit utilization ratio and as a result your credit score will improve. A higher credit limit can also be used as to get a bigger loan from the issuing bank.
2.Helpful in Emergency:
Life is full of unexpected events. A credit card with bigger credit limit can be useful in emergencies. One may face much sudden expenditure like heavy medical bills, misplaced of luggage while traveling, car repair; where lump sum payment may be required within an hour and you may not get enough time to access to your bank account. In these cases, credit card with higher limit is really useful.
3.More Purchasing Power:
It’s obvious that you can buy large appliances by using your credit card with higher credit limit. However, if you don’t want to use cash then you can also opt for store financing or EMI option but this indicates another line on your credit report. But you can buy the entire things with a credit card with bigger credit limit without taking another credit/loan into your account.
Disadvantages of having higher credit limit
Higher credit limit sometimes creates problem for you also if you don’t take necessary preventive measures. The disadvantages of having higher credit limit are as follows:-
If you are a shopaholics then never ever go for a card with higher credit limit. Generally this type of person loves to own the items whatever they find interesting around them and a credit card with higher limit may be a disaster for them. As a result heir budget will be off track. As a result, they may not be able to pay the full amount and this will have a negative impact on their credit score.
If the card is stolen or used by the fraudsters then damages will be higher. In this case, users should take some preventive measures i.e. always carrying emergency bank number with him so that he can block the card within a minute if he needs so. Another measure he can also take that he should set an alarm system whereby the issuing bank will inform him about the transaction which does not match with his spending pattern.
3.High Interest Payment:
As I was discussing that reckless spending may create unpaid debt in credit card. Normally the credit card companies charge high interest on the unpaid amount. In this situation, your budget may overshoot due to high interest payment.
Everything has its bad and good effects. Credit card with higher limit is not an exceptional. It is “YOU” who can use the situation in your favor. Keep your budget and spending within right track and have a secure financial life.