Are you aware of the disadvantages of increasing credit limit? Relax! This article will provide inclusive knowledge regarding the downsides of increasing credit limits. Coming to the disadvantages, you should know about the credit limit. Then let’s understand it first. A credit line is the maximum amount of credit a financial institution can provide to a customer through a credit card or line of credit. In such cases, lenders often set credit limits based on certain information, including the income and employment of loan applicants. Credit limits are a factor that affects the credit rating of customers and their ability to get credit in the future. Let’s come to the disadvantages of increasing credit limit.
What Are The Disadvantages of Increasing Credit Limit?
The list of some important disadvatages of increasing credit limit is given below,
- Temptation To Overspend
- Credit Score May Fall
- Hard Inquiry On Credit Report
- Difficulty In Getting A Loan
- Higher Risk Of Identity Theft
- A higher Credit Limit Means More Total debt
- Irrelevant Purchase
Disadvantages of Increasing Credit Limit
Let’s have a detailed explanation of the disadvantages of increasing credit limits,
Temptation To Overspend
Imagine you have a thousand dollars in your pocket or in a digital wallet. You may spend it at the right or wrong place, to buy essentials and also buy some irrelevant tongs with it. It is basic human nature that when you have money in your pocket or in your card, your spending ultimately increases without your consent. Due to increasing credit limits, it is found that people often spend more than their means, build up interest, and fall into a spiral of compounding interest fees and late payments. Therefore, to not fall into this debt trap, it helps to adopt a long-term mindset with your finances and use tools like a budget to track your spending.
Credit Score May Fall
Due to increased credit limits, your spending also increases leading to a poor credit score. Due to bulky spending beyond your earning, you may fail to repay the payment and hence your credit score gets reduced. If you spend more, you will offset the effect of that boost. The more you use your credit limit, the higher your credit utilization ratio will be leading to a decline in your credit score.
Hard Inquiry On Credit Report
Do you know? There are two kinds of credit inquiries namely soft and hard. If you request a credit increase, your respective ban may perform a hard pull of your credit report. Hard pulls hurt your credit score and stay on record for two years. It means for the next two years a bank will request your permission before doing any credit inquiries.
Difficulty In Getting A Loan
Once your credit score falls due to increased credit limits, it will become really tough to get a new loan, or they will offer you worse loan terms with a higher interest rate. Because any institution that distributes loans checks their borrower’s credit scores first. A credit score is a three-digit number ranging from 300 to 900. It is used to determine the creditworthiness of a person. When you don’t pay repayment installments on time your score starts decreasing from 900 to below.
Higher Risk Of Identity Theft
When your credit limit increases, credit bureaus will share your updated information with data brokers and marketers who will send you credit card or load offers. Your information is more accessible and hackers can use it to commit fraud. High scores and good scores will attract more thieves.
A higher Credit Limit Means More Total debt
One of the biggest disadvantages of having an increased credit limit is the potential for more debt. If you are experiencing financial difficulty and have used the rest of your available credit, you are likely better off refinancing your credit card debt via a lower-interest personal loan or line of credit.
When you have limited money in your pocket, then you buy only essential things. But on the opposite side, when you have a bulky amount in your bank account, then there are very high chances that you will buy irrelevant things. For example, buying a new car even if you already have a few cars. The increasing credit limit can spoil your financial habits and leads to a debt trap. Therefore, to escape from this, understand your financial spending habits and work according to them.
Well, all these were the disadvantages of increasing credit card limits. Let’s know some advantages too.
Advantages of Increasing Credit Limit
The advantages of increasing credit limits are
- A better credit score
- More spending power
- Peace of mind
- You can purchase your dream car or bike
- Financial freedom
- Fulfill family’s needs
Everything has its disadvantages on Disadvantagess you will get to know more.
Is It A Good Idea To Increase Credit Card Limit?
Increasing your credit limit can lower your credit utilization ratio, potentially boosting your credit score. A credit score is an important metric that lenders use to judge a borrower’s ability to repay. A higher credit limit can also be an efficient way to make large purchases and provide a source of emergency funds.
Does Increasing Credit Limit Hurt Your Credit?
Although a credit limit increase is generally good for your credit, requesting one could temporarily ding your score. That’s because credit card issuers will sometimes perform a hard pull on your credit to verify you meet their standards for the higher limit.
What Is A Good Credit Limit In India?
Normally Credit Card Limit is around 2.5 to 3 times of monthly gross salary. Assuming my monthly gross salary is 1 Lakh. My credit card limit should be between 2.5 lakh to 3 lakh.
Why Do Banks Ask To Increase Credit Limit?
Card issuers obviously want as many cardholders as they can get, because the more they have, the more revenue they can generate from them. Raising your credit limit gives you one more reason to stick around and continue using your card. Issuers don’t want you to move to another card if they can help it.
In this article, you have understood the advantages and disadvantages of increasing credit card limit. If you have read this article till the end, you are very lucky to have an idea about the dangers associated with the increased credit limit. A line of credit is the maximum amount a lender will allow you to use with a credit card or revolving line of credit. Lenders set these limits based on a variety of factors, including your credit score, personal income, and credit history. Lenders tend to have more restrictions on borrowers they perceive as less risky. So, don’t forget the disadvantages of increasing credit limit in front of increased money.