Earlier, credit card companies used to compete with each other to increase the limit on your credit card. But, the recent slump in the economy has completely changed the scenario in this industry. Although many companies advertise about high limit cards for people with average scores, they are reluctant when it actually comes to granting them.
Most card companies choose to play safe and hence, grant low-to-medium limits to such people. Nonetheless, you can certainly apply for a higher limit upon your existing credit card or acquire a new one with it. But before that, you must understand if applying for one is indeed a good idea or not.
There are two schools of thought when it comes to credit limit on the credit cards. One school of thought advocates responsible usage and says that you should apply for only as much credit limit as you need. While the other approach is a little rebellious and says that you should apply for as much as you can get it, irrespective of your spending habits.
Each approach has its own pros and cons. Low or medium limit may force you to keep your expenditure in check. However, it is only good as far as you are repaying your bills on time, have a stable income, and a good credit score. In short, it is for people who are used to living on a strict budget.
However, an unforeseen expenditure may cause your whole budget to go awry. In that case, a higher credit limit can come to your rescue.
Besides, such cards are particularly useful in improving your score. How? To answer this question, we might have to understand a few basics about the card limits. Credit limit is the maximum amount you are allowed to spend on your card each month. This amount appears on your monthly credit card statement.
Similarly, total credit limit is the summation of all the limits on all the cards that are in use. Another thing to understand is the utilization rate, which is nothing but the impending balance on a credit card expressed as a percentage of the credit limit.
For instance, if you have a card with the limit of USD 10,000 and you generally spend about USD 2000 on credit, then your utilization rate comes to about 20%.
Utilization rate, credit limit, and score are all interconnected. High utilization rate often reflects bad score. It is recommended that you should not exceed your utilization rate beyond 50% on a single card and beyond 35% on all the cards put together. If you have a low credit limit, then your utilization rate is bound to increase.
In the given example, we had assumed the limit as USD 10,000. Now, let us see what happens when it is USD 2000. With a monthly expenditure of USD 2000 on a USD 2000 limit, your utilization rate shoots to a whopping 100%. Needless to say, this will hamper your FICO score and tarnish your credit report.
On the other hand, when you apply for a higher one, you can decrease your utilization rate without actual decrease in the debt. With the limit of USD 20,000 or more, your utilization rate for USD 2000 expenditure plummets to a mere 10%, which reflects excellent spending habits.
Thus, your average credit score may actually get a boost and even the banks will be forced to improve your credit report. Thus, such cards are indeed a great option, provided that you stick to your usual spending strategy.
How to Apply?
Your credit history, score, and relations with the card company are the factors that play an important role in determining your credit limit. Hence, always try to approach those companies with whom you have a good relation.
Inquire if you can get a raise on your current limit, so that you don't need to apply for a new card. However, make sure that you are not requesting too high a limit as it may lead to denial of your request. Get the quotes and compare the interest rates and credit limits of different companies and apply for the one that suits you the best.
Such cards are desirable only if you promise to stick to your budget. Increasing unnecessary expenditure may defeat the purpose of getting one.