From time to time, your lender will proactively ask you if you’d like to increase the limit on your credit card. But should you agree?
It’s easy to see these offers as a form of validation – a sign your lender likes you or an indication you’re moving up in the world. So it’s easy to automatically say yes.
That would be a bad idea. While there can be benefits to having a higher limit, there can also be consequences.
That’s why the smart thing to do is to weigh up the pros and cons before making a decision.
Pro 1: More convenience
More credit equals more convenience, especially when you’re paying for major expenses like holidays or making a lot of transactions in a short period like at Christmas. That way, you don’t have to run the risk of carrying large amounts of cash. Also, you can avoid ATM fees.
Pro 2: More emergency money
More credit also means you’re better placed to deal with unexpected crises, such as when you’re hit with a large medical bill or you need to make emergency repairs to your home. In those situations, it can be a blessing to be able to spend money you might not have on hand.
Pro 3: More rewards points
Another advantage of shifting more payments from cash to credit is that it allows you to rack up more rewards points. That ultimately means more money in your pocket, as long as you pay off your credit card during the interest-free period.
- More convenience
- More emergency money
- More rewards points
- Debt risk
- Mortgage risk
- Rejection risk
Con 1: Debt risk
The higher your credit limit, the more likely you are to fall into a debt trap. People are more likely to make irresponsible purchases when they pay with credit, because the physical act of handing over cash can act as a restraining force. When you don’t have to surrender cash, you often don’t realise how much you’re spending until the bill arrives at the end of the month. If you don’t pay the bill in time, you’ll be slugged with high interest rates.
Con 2: Mortgage risk
Even if you do pay off your credit card each month, a higher credit limit might make it harder for you to get a mortgage. When lenders are drawing up a list of your assets and liabilities, they might calculate your credit card debt not as the amount you actually owe but the amount you could owe. So a $1,000 debt against a $5,000 limit might be assessed as a $5,000 debt, whereas a $1,000 debt against a $2,000 limit would only be assessed as a $2,000 debt.
Con 3: Rejection risk
Just because your lender has invited you to apply for a credit increase, it doesn’t mean your application will be accepted. That would not only be annoying, it would also be damaging, because your credit score suffers when you get declined credit.