If you've been using a credit card for a while and paying your bills on time, chances are you've received a message from your bank offering a higher credit limit. For many cardholders, the offer feels like a reward. But should you automatically accept it?
According to Nasir Salim, Managing Director of Flexi Capital, the answer depends less on the size of the limit and more on how disciplined you are with credit.
A credit card limit is typically determined by a combination of factors including income, credit score, repayment history and existing debt obligations. Banks assess these variables to gauge how responsibly a customer handles money before deciding how much credit to extend. "Your credit limit reflects how much the bank trusts your financial behaviour," Salim said during an interaction on NDTV Profit's Your Money Matters.
As customers continue to make timely payments and demonstrate responsible usage, banks may periodically offer higher limits. While there is no fixed formula governing how often such offers are made, lenders generally reward good repayment behaviour with greater access to credit.
Not A Bad Thing?
Contrary to popular belief, a higher credit limit isn't necessarily a bad thing. In fact, it can improve your credit profile if used correctly. That's because credit bureaus track not only how much you spend but also how much of your available credit you're using — a metric known as the credit utilisation ratio.
Experts generally recommend keeping utilisation below 30% of the total available limit. For example, if you have a combined credit limit of Rs 5 lakh across multiple cards, your outstanding balance should ideally remain below Rs 1.5 lakh. "A higher limit can actually help improve your credit score because it lowers your utilisation ratio," Salim explained. "The idea is to use your card regularly but never come close to exhausting it."
This becomes particularly relevant for individuals holding multiple credit cards. Credit bureaus evaluate aggregate credit exposure across all cards and lenders. While having multiple cards is not inherently negative, excessive utilisation across those cards can hurt your credit profile.
Issue Of Flexibiity?
Another common argument in favour of accepting a higher limit is the flexibility it offers during emergencies. A credit card can provide temporary liquidity for unexpected medical expenses, travel disruptions or urgent purchases.
However, Salim cautioned against treating credit cards as a substitute for an emergency fund. "A credit card can serve as a short-term emergency backup, but it should not replace a proper emergency corpus because of the high interest costs associated with revolving credit," he said.
Ultimately, the decision to accept a limit increase comes down to personal financial discipline. If you're paying your dues in full every month and keeping spending under control, a higher limit can improve flexibility and even support your credit score.
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