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The pros and cons of getting a higher credit limit

Vidhu Bajaj avatar
Vidhu Bajaj
- 9 min read
The pros and cons of getting a higher credit limit

A key component of any credit card is the credit limit. This is the amount of credit or money the card issuer allows you to have on your credit card to use for purchases.

Credit card issuers would occasionally send out offers to customers to encourage them to increase their credit limit, especially customers with a good repayment history. Although these offers are no longer allowed due to changes in credit laws, you may still consider increasing your credit limit from time to time based on changing circumstances.

There can be advantages to a higher credit limit, including access to extra money for emergencies or to make larger purchases. However, it's important to use caution when deciding whether to increase your credit limit because a higher credit limit also comes with some disadvantages. With a higher credit limit, you may be more tempted to spend beyond your means and get yourself into a bad financial state. Before deciding whether a higher credit limit is right for you, ensure you understand the pros and cons that come with an increased limit.

What is a credit limit?

A credit card limit refers to the maximum amount of money that you, as the cardholder, can spend on the card in total. There may be a daily spending limit or other similar limits placed on the card, but the credit limit is the total amount of credit you have available to accumulate on any one card.

When you apply for a credit card, you’ll likely be asked about the credit limit, and the amount you choose could affect whether you’re approved for the card. You may ask for a certain credit limit, but that doesn’t mean the card issuer will actually give you that amount.

Your credit limit is determined by the credit card issuer and based on your financial situation. All credit cards in the market also have minimum and maximum credit limits that card issuers allow for that particular card, so it’s best to check these before applying. Cards with substantially higher maximum credit limits may also require you to earn a minimum income for you to apply for them, which is why it’s usually best to compare credit cards before applying.

Remember that credit cards lend you money that isn’t yours and require you to repay it within a certain period, or you’ll be charged interest. It’s often a good idea to try and get a credit limit that’s in line with your financial situation and won’t tempt you to overspend. Consider an amount that you can afford to repay in full each month to avoid carrying a balance on your card and accumulating interest and, therefore, more debt.

If you are offered a higher credit limit than you think is necessary, you can request for it to be lowered. Decreasing your credit card limit can benefit you when trying to take out other types of credit, like when you apply for a home loan. Decreasing the limit can also prevent you from being tempted to use that additional credit and therefore get into a level of debt that causes financial stress.

When assessing you for other forms of credit like personal or home loans, lenders may use your credit limit rather than the outstanding balance to calculate your borrowing capacity. This means they’ll assume your credit card is maxed out and calculate your liabilities as if you have to repay that full amount. So if you have a credit limit of $5,000, but you pay off the balance each month, it doesn’t matter. When assessing how much they will allow you to borrow, a lender will assume the whole $5,000 as a liability rather than see how the card is used. This could then lower the amount you might be able to borrow for a house.

The other possibility could be that you’re approved for a lower credit limit than you needed or wanted. A higher credit limit may seem desirable, but it may not be the best option for you. If there is a specific reason you require a higher limit, like a specific purchase, you could discuss this with the card issuer or work on reducing your other liabilities to increase the limit later.

Always remember that just because you can have a higher credit limit doesn’t mean you should. Ensure you balance all the pros and cons of having a higher credit limit before you apply for one.

The pros of getting a higher credit limit

The biggest advantage of having a higher credit limit is having more credit at your disposal. This translates to other benefits, including:

More convenience

Having a higher credit limit offers a range of additional convenience when it comes to your ability to make purchases you need. With the additional money you have available on a credit card with a higher limit, you can better plan for large purchases such as a holiday or purchasing a major appliance.

However, a higher credit limit could also increase the temptation to spend. While it can be helpful to take advantage of the interest-free periods on a card to manage your cash flow temporarily, spending beyond your means or carrying a balance on your credit card could lead you into a debt trap that you might struggle to escape. This can be especially troubling if you have a higher-limit credit card because the higher limit means a higher base debt that is charged interest.

Access to cash in an emergency

Having a higher credit limit on a credit card could provide a financial safety net in emergency situations. Whether you need to pay an unexpected medical bill or need to get some urgent car repairs, having the funds available on a credit card could provide you with peace of mind, but beware of the temptation to use it outside of emergency situations.

Accumulating rewards and points

A higher credit limit means you could spend more money on your card, and if the card lets you earn rewards, this can have some benefits. With a rewards-based card, being able to spend more means you’ll likely accrue more points or rewards on your card. If you then pay off the full balance each month or within the interest-free period, you can maximise these rewards to get more value out of your spending.

The cons of increasing your credit limit

A higher credit limit may provide some people with a sense of security, but it can also offer too much temptation for some. This temptation can then be damaging for both your hip pocket and credit score if you end up spending more than you can afford to.

Some potential disadvantages of a higher credit limit include:

Debt accumulation

A higher credit limit could increase the temptation to overspend, potentially leading to debt accumulation that causes financial stress. 

People are more likely to make irresponsible purchases when they pay with credit. The act of parting with physical cash (or seeing your bank balance decrease) often acts as a psychological barrier. This can help make many people think twice before making a frivolous purchase.

However, with a credit card, it sometimes becomes difficult to realise how much you’re spending until the bill arrives at the end of the month. And then, if you’re unable to pay off the balance, you’ll be charged interest. With credit cards, the interest rates can be quite high, causing a faster accumulation of debt. 

Rejection risk may affect your credit file 

A higher credit card limit can not only lead to higher credit card bills and interest payments but also affect your ability to get other forms of credit in future.

When you apply for a credit limit increase, the credit provider will perform a hard enquiry to assess your creditworthiness and suitability for taking on more credit. This will be noted on your credit file, and if your application gets rejected, that rejection will appear on your credit file as well. 

If a lender then looks at your credit file when assessing you for another type of credit and sees that you’ve had multiple credit enquiries of a similar type rejected, the lender will see you as a higher risk. The lender may see this as you being credit hungry and therefore not in the best financial situation, which can lead to being rejected again.

Impact on a mortgage or other credit applications

Rejection isn’t the only way applying for a higher credit limit can affect future loan or credit applications. If your request for a higher credit limit gets approved, it can still affect other applications by reducing your borrowing capacity, which may affect the amount of money a lender will offer to lend you.

Most lenders consider your credit card limits when assessing your overall financial health and deciding on how much they might want to lend to you. However much you spend on a card, it’s the total credit limit that lenders take into consideration when calculating your future debts. A higher credit limit is therefore seen as a liability because you may max that out, and lenders will typically take this into consideration when assessing your loan application. This will then lead to them offering you less than what you were expecting in a loan.

Can a high card limit negatively affect your credit history?

A high credit card limit may not directly affect your credit history, but it could affect your eligibility or borrowing capacity for future loans. 

There is also the temptation to overspend with a higher credit limit. Spending more than you can afford to pay off in a billing cycle could lead you to carry a balance on your card, which incurs interest charges which are often quite high. As your credit card debt accrues, you may find yourself in a debt spiral that may be difficult to get out of. This may lead to financial strain and affect your overall financial health badly. The combination of a high credit limit and an outstanding credit card balance could also lead lenders to think of you as a high-risk borrower. This can then negatively affect any credit or loan applications you make in the future. 

In a nutshell, even though a high credit limit doesn’t directly affect your credit history, it could negatively affect your future loan applications. At the same time, using a credit card responsibly could help build your credit score, which may help any applications for future credit. Whatever the credit limit on a card, it’s how you manage your credit card debt that will affect your credit history the most.

How to better manage your credit card with minimal effect on your credit rating:

  1. If you can afford to, pay your credit card balance off in full each month: If not, try and pay more than the minimum repayment amount, as this is typically only around two per cent of the total balance owing. It can take years to pay off your debt if you only pay the minimum repayment on a credit card. All the while, you’re being charged interest, increasing that balance more.
  2. Keep your credit card and loan applications to a minimum: Every time you apply for a loan, credit card or even a mobile phone contract, utility or any type of product that requires regular repayments and involves doing a credit check, it’s marked on your file.
  3. Pay your credit card bill on time: Any late payments may affect your credit rating – that goes for any type of bill. You may also incur late payment fees, which will be added to your debt.
  4. Compare credit cards online to find one that suits your spending pattern and lifestyle: Check interest rates, fees and other benefits on various cards to select one that gives you the best value for your money.
  5. Don’t let your high credit limit come back to haunt you when it comes to applying for a mortgage: If the credit limit on your credit card is higher than what you need, ask for this to be reduced before you start applying for other loan types, especially a mortgage. A lower credit limit may look better for any future loan applications.

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Product database updated 30 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.