Why and how to set your credit card limit: When to raise the limit

“The whole point of credit cards, the way they are rendered most profitable, is that we dig ourselves into debt and stay trapped there forever.”

To avoid being in such a situation, you should know your limits - where to stop and how to manage a credit card properly.

In 2016, average credit card debt in a household was about $16,048.

The average household with credit card debt pays about $1,292 in interest every year.

Everyone of us use credit cards; but, how many of us know what is meant by credit limit?

Do we have adequate knowledge about it?

Why and how to set your credit card limit

Let’s talk about the credit limit - why to set it, how to do it and whether or not to raise it; the knowledge will help us to manage our credit cards properly.

1 Why should you set your credit card limit?

When you take out a credit card, the issuer assigns a limit beyond which you can’t spend in a month or before you pay back the outstanding balance.

It is set so that you can’t spend beyond your limit.

But, in most cases, you’ll see that the limit is probably more than what you can repay, say, in a month.

So, the limit doesn’t signify that you’ll be able to manage your credit cards responsibly. It won’t make you a responsible user.

Therefore, it is very important to set a credit limit for yourself.

2 How to set your credit card limit

First of all, forget what your credit card issuer has set the credit limit.

Then, analyze your finances and decide how much you can spend so that you can repay the amount comfortably, at the end of every billing cycle.

Your mission should be to earn the rewards without spending uncontrollably.

Tips to set your credit card limit

Follow these 2 tips to set a good spending limit (on credit card) for yourself:

1 Plan a suitable budget

You need to plan a suitable budget to decide an amount you can spend. Now it’s your decision how much limit you set on your credit card(s) and how much you pay by cash.

Plan a budget such that you can follow it without much difficulty.

It’s relatively easy to follow the 50-30-20 budgeting rule: 50% of your after-tax income for your necessities, 30% for wants, and remaining 20% for savings.

You can also try other budgeting techniques if that suit you.

2 Do not call your issuer to lower the limit

Don’t take my words so seriously that you’ll call your issuer to reduce your credit card limit.

Doing so can reduce your score since your credit utilization ratio will increase with the decrease in your available credit.

Credit limit - What you need to know

Here’s what you need to know about your credit card limit:

Each lender has its own criteria to create credit limits
Higher limit and lower usage can increase score
Disclose all sources of income to have a higher limit
Research on credit limits from different issuers before choosing a card
You can request a credit limit increase if you manage a card properly
You can qualify for raising limit if your score is good
Lower your spending when you reach the limit
Pay a portion of your outstanding balance if spending is more

Advantages of raising credit card limit

Now, let’s have a look at the advantages and disadvantages of raising credit card limit in details.

1 You can have more buying power

If you want to buy a big ticket item, then with a higher credit limit, you can purchase without having to wait for financing approval.

Though it’s always better to repay outstanding balance at every billing cycle, you can opt for EMI option for a fixed number of months if you can’t pay the price within the same or next billing cycle.

2 Credit score may get increased

With the rise in credit card limit, the credit utilization ratio will be lower, since it’s a calculation based on debt to credit ratio.

3 No need to worry much about rainy day

You know that you have a cushion for sudden expenses. So, you won’t have to worry about rainy day much, and you’ll have a peace of mind.

But, it is advisable to save about 5% of your monthly income for the rainy days and it’s not a wise idea to charge your credit card for the entire amount.

Disadvantages of raising credit card limit

The advantage of raising the limit on your credit cards may prove to be disadvantageous, too. Find out how:

1 Increasing limit may dint score

If you take out a new credit card to increase the overall credit limit, the your score may lower down by some points, say about 7 points.

2 You may incur more debt

When you request a credit limit increase and it gets approved, that is, the card issuer raises the limit, it may entice you to spend more; much more than what you can repay at the same billing cycle.

So, be very careful not to spend more after raising the spending limit of your card(s).

However, if you incur debt, choose a suitable option to pay back and get out of debt.

How to keep credit use under control

To conclude, here are a few tips to keep your credit use under control, irrespective of whether or not your credit limit is increased.

1 Plan a budget and stop spending unnecessarily

To stop spending unnecessarily, plan a suitable budget and don’t purchase anything that’s not in your plan.

It’s very much required - Adopt the habit of saying ‘NO’ to yourself.

2 Repay debt as soon as possible

If you incur credit card debt, stop using the cards and repay the debt as soon as possible. Also, do not apply for additional credit, but focus on paying off your credit card debt as fast as you can.

3 Check your credit situation periodically

You should always review your credit situation and take necessary steps if required. Make sure you check your credit reports at regular intervals and dispute errors if necessary.

Also check your credit score at least once annually so that you have an idea about where you stand.

So, what have you decided? Do you need a credit limit raise?