Behavioural biases that damage your investments!

Credit card companies tend to sanction a lower credit limit to the ‘new to credit’ customers. The applicants are offered a higher credit limit only after a consistent record of spending and repaying is displayed by the card holder. Meanwhile, customers itself avoid accepting a higher credit limit due to the fear of falling into a vicious debt trap. People get lured to spend more than their repaying capacity once offered with the leverage to do so. Hence, a higher credit limit comes with it’s own set of benefits and risks.

“The biggest advantage of having higher credit card limit is the fact that it can lower your credit utilisation ratio if used judiciously, which can have a positive impact on your credit score,” said Adhil Shetty, CEO at BankBazaar.com.

Consider this: you have a credit card with a limit of Rs 50,000 and you spend Rs 25,000 on an average each month with it. This means you are utilising half of the available credit. So your credit utilisation ratio is 50%. Now if your bank increases your credit limit to Rs 75,000 and you keep your spending constant at Rs 25,000, then your credit utilisation ratio reduces to 33.33%.

Citing the above example, Shetty pointed, “This means you are spending way less than the credit access you have, which implies you are financially secure and less likely to default.”

Higher credit limit can save you in times of extreme financial shortfalls or exigencies. It would help you arrange funds for an unexpected expenditure like a health emergency, etc. The biggest advantage of having a credit card is the immunity it provides to your liquid assets.

“When faced with a financial emergency, a credit card with a high credit limit can be invaluable. Instead of trying to raise funds from family or friends or taking for any loan, your credit card can come in handy to ride the financial crunch,” Shetty asserted.

Besides, if you’re unable to repayment the outstanding debt in one go, you always have the option to convert the entire card bill or part of it into EMIs and pay accordingly. In fact, certain merchants and manufacturers often tie-up with credit card companies to offer EMI facilities on goods and services at lower interest cost. Some of these offers include the facility of no-cost EMIs as well. Various discounts and cash backs are also up for grabs both from the merchants as well as the credit card issuers themselves.

“The higher the credit limit of your card, the higher will be your rewards. Banks reward all its their premium cardholders with extra reward points and added benefits. So, with a higher credit limit, expect your reward points to generate you more savings than earlier,” Shetty added.

Also, loans against credit cards have become prevalent over the last few years. Thus, having a higher credit limit will allow you to avail bigger loan amounts too. These loans are basically pre-approved but offered only to select credit card holders demostrating a consistent repayment history. The loan disbursal is completed the same day of making the application which makes credit card loans an attractive bet for customers across.

The only risk of opting for a higher credit limit, however, is the habit of overspending and getting chaotically trapped in the cycle of infinite debts. On the bright side, if you’re smart enough to make judicious use of the leverage, it can indeed be a fruitful deal.