People with good credit scores are easily approved for high limit credit cards for fair credit, since good credit rating is a prerequisite for the same.
People with good credit scores are usually given the benefit of high credit limits on their unsecured credit cards. The credit limit of a card refers to the maximum amount of credit that is available to the consumer. This amount is quoted in the monthly statement that is made available to the card holder. A secured credit card has a credit limit that is 50-100 percent of the amount deposited by the consumer in lieu of collateral.
This is because secured credit cards are sought by consumers with poor credit scores. High credit limit for fair credit is after all a fair practice, since any credit worthy consumer deserves to be rewarded in the form of increased credit limits. The following paragraphs delves into the advantages and disadvantages of high limit credit cards for fair credit.
Improved Credit Scores
The credit score of a consumer is inversely proportional to the credit utilization ratio. The credit utilization ratio is calculated using the following formula:
Credit Utilization Ratio = Outstanding Credit / Available Credit
Increased credit limit has the effect of increasing the total amount of available credit. Assuming that the consumer does not incur additional debts, increasing the credit limit will have the effect of lowering the credit utilization ratio. This in turn improves the credit score of the consumer.
A High Credit Limit begets Increased Credit Limits
The effect of increased credit limits can be cyclical. This can be best understood by examining the relationship between credit utilization ratio, credit scores, and credit limits. As we are well aware, these 3 variables are related. It’s evident that a high credit limit boosts credit scores, however, an improved credit rating will again encourage credit card companies to increase the credit limit of the consumer. Hence, it is said that a high credit limit begets increased credit limits.
Negative Impact on Credit Scores
Although high credit limit cards are believed to have a positive impact on the credit score of the consumer, there are instances when a consumer’s credit score may suffer due to increased credit limit. This will happen if the credit card company does not report the consumer’s credit limit to the credit bureaus. According to the Fair Credit Reporting Act, if the consumer is allowed to make unlimited purchases on the credit card, the credit limit need not be reported while the outstanding balance has to be reported to the credit bureaus. This results in an inflated credit utilization ratio and consequently lowers the credit score of the consumer.
Fear of Running Up a Big Tab
A consumer, who has high credit scores, may work up a huge outstanding balance and may find it difficult to pay the entire balance at the end of the billing cycle. If the consumer finds it difficult to pay the entire debt and pays only the minimum monthly balance, the credit score will definitely get affected on account of a high credit utilization ratio.
It’s always better for a consumer to stay well within the credit limit even if he/she has a high credit limit. One should ensure that the credit card company reports a high credit limit or specifies it as limitless, as the case may be, since failure to do so will impact the credit rating of the consumer.
‘The Credit Cardholders’ Bill of Rights’ has resulted in credit card companies reducing the credit limit for customers in addition to increasing the annual fee, the account set-up fee and the annual percentage rate on credit cards. Although, high limit credit cards for fair credit have not become redundant, there is a good chance that even consumers with excellent credit rating may find it difficult to stumble upon these cards with the same ease.