A credit card limit increase sounds like a great option that can help you increase your monthly spending limit and manage your expenses better.
But is that true for every person? In theory, this is a lucrative offer that no one can deny. But practically, this seemingly lucrative option can lead to debt accumulation that can leave a negative impact on your credit score and financial position. It depends upon the user, pattern of spending, and income level.
This is why the agreement to credit card limit increase varies from individual to individual depending upon personal factors that dictate the course of action the user should take.
When should you accept an increase in your credit card limit?
The above factors are shared to help you make an informed decision about the credit card limit. A credit card limit increase can be quite beneficial for users depending on their personal financial sources, spending patterns, and usage. In certain circumstances, it is a great decision to accept an increase in credit card limit. Here are some circumstances in which you should agree to a higher credit card limit.
Financial stability: if your financial sources and background are stable, then you should agree to a higher credit card limit. The major issue with the credit card limit increase is the inability to pay back the outstanding debt because of the high chances of debt accumulation. But if your financial backing is quite attractive and you are making hefty money from your sources, then there is no harm in accepting a credit card increase. When you have enough resources to cover the increased credit card limit, then why not enjoy the perks attached to the higher credit card limit?
Huge monthly expenses: If your monthly expenses are quite huge and you cannot manage them with the current credit card limit, then it is a better option to get an increase in the credit card limit. Huge monthly expenses can become a huge burden on you, especially if you are short on liquid funds. An increase in credit card limits helps you to manage huge monthly expenses without having to worry about managing routine finances.
Rewards offset the annual fee: With an increased credit card limit, you get the chance to earn more rewards and benefits. These rewards can be substantial enough to offset the heavy annual fee that you pay for your credit card. Enjoying the rewards helps you to account for the annual fee, and you enjoy the benefits of using the credit cards as well.
Improve credit score: If you are desperate to improve your credit score, then there is no better way to do it than to increase your credit card limit. This way, you can lower your credit utilization and can positively impact your credit score. The credit utilization ratio impacts 30% of your credit score, and improving the credit score is desired to gain financial assistance in the future in Canada.
We will now go into the details of the factors you should also consider in your decision.
Factors to consider
In Canada, credit card issuers can offer you to increase your credit card limit if you are a financially sound user. You can also request an increase in your credit card limit. Here are some factors that the users should consider before agreeing to the credit card limit increase. These factors will dictate if it is feasible for you to agree to the credit card limit increase or not.
Current debt: It is important to check out the current level of debt. If you are already revolving the credit from one billing cycle to another, then it means you are already accumulating debt. If your current debt is already too much, then it is not a good idea to increase your credit card limit. This way, you will be tempted to get more debt, considering that you have a high limit. But in essence, you will end up accumulating even more debt that can cause a great financial burden in the long run. High debt accumulation can be quite difficult to pay back and can even lead to bankruptcy.
Spending habits: If you are an impulsive buyer who spends limitless without maintaining balance, then the high credit card limit is not suitable for you. A high limit will tempt you into spending more, causing your debt to rise. Contrary to this, if you are a responsible spender who always spends as per requirement and manages the expenses effectively, then a credit card limit increase will surely assist you in managing your monthly expenses even better. It will give you a better chance to manage your expenses in a better way to avail the rewards and benefits without escalating your debt to a level that you can't repay.
Emergency Fund: Emergency funds are necessary for every user who can help in case of an unexpected and unfortunate situation. If you want to keep the high credit card limit as an emergency fund, then it is surely doable. However, many Financial advisors recommend having a line of credit for these scenarios because they have a much lower interest rate than credit cards.
Impact on credit score: The way that credit card limit impacts the credit card is through credit utilization. Credit utilization is the ratio between the limit you spend each month to the credit limit allowed to you. With an extended credit card limit, you can get more funds to spend. If you keep your expenses the same as previously, then you can improve credit utilization by agreeing to a higher credit card limit. In this way, you can keep the expenses the same while increasing the credit limit, which will lower your credit utilization and positively impact your credit score. This is an epic way to improve your credit score. All you need is to make sure that you do not increase your expenses.
Financial Budget: Your monthly financial budget is a great way to assess how much debt you can pay back each month. If your financial resources support a hefty budget, then you can surely agree to an increase in your credit card limit. If your monthly budget covers the outstanding debt of your credit card, then you can surely agree to accept the credit card limit that matches your budget. Contrary to this, if your budget is too shallow to cover your outstanding debt, then it is better to play safe and have a corresponding lower credit card limit. Such a limit won't allow you to spend more than your budget.
Financial priorities: You need to consider the financial priorities that you have planned for yourself. If you are planning to save on a dream project, buy a luxurious asset, or invest in a project that can benefit you in the future, then you probably should not agree to a credit card limit increase. This is because you might unintentionally spend more than you have planned for a month and will fail to keep away the funds for your savings. This is why if you have a bigger goal to achieve, then it is better to have a low credit card limit.
Better terms: Some credit card issuers offer better terms and conditions to the users if they agree to have credit cards with higher limits. This way, credit card issuers try to persuade elite users to increase their number of credit card users. Better terms are offered to convince the users, and such terms might be extremely useful for the users as well. For instance, if you travel a lot and you are offered great travel benefits if you agree to a higher credit card limit, then it can be quite beneficial for you. Such terms offer a win-win situation for both users and credit card issuers because they are aimed to offer benefits to both.
Reward programs: The reward programs of some credit card issuers become more beneficial when the users spend more with a credit card. The higher credit card limit allows users to spend more with their credit cards and earn more rewards than before. This way, the users are offered to earn more reward points and enjoy more benefits with the increased credit card.