Increase Your Credit Limit on Your Credit Card, or not?

From time to time, I always got a letter from my credit card issuer offering to increase the credit limit of my credit card. Some times, I take the offer and have my credit card get higher purchasing power, but most of the time that letter go strait to my shredder and then rubbish bin. So, when actually we need to increase the credit limit, and when we don’t? This is my guideline…

The Real Reason of Having a Credit Card

Before I proceed, please always be reminded that:

• the real reason we have credit card is for convenience, not for the debt, not for the “extra money”.
• we will pay off the credit card bill at every monthly due date
• If credit card purchase become debt (because you did not pay it off), it will be very expensive debt (why pay 20% interest if you can get at least half of it by applying personal loan for example ? )

As long as we are all remember all of the above, then let’s proceed.

Need an Increase, Yes !

So, when we need to increase the credit limit?

• 

  Wallet Purchasing Power

  If your credit limit is below 2 x of your monthly spending. Your credit card need to have double of your monthly spending. For example: if your monthly budget is $2000, then you need a credit card that has at least $4000 credit limit. This is mainly because while waiting the due date of the monthly statement, you will need to keep on living with your next month budget. For further detail read: 7 Ways to Maximize The Benefit of Credit Card
  So, when the initial credit limit below 2 x of your monthly spending, if the company offer an increase. Take it.

• To match your other credit card (To achieve 2 credit cards of similar value)
• You need to increase your emergency buffer, for example you have a new born, then $2000 credit limit will not be enough for monthly shopping and emergency access. Remember using credit card as emergency fund is not recommended. You always need to have emergency cash on your saving account. However, you can use the credit card as the access to it (pay with credit card first and the before due date you will pay it off with the actual emergency fund).
• You will be traveling overseas. When travel overseas, credit card use will enhanced your convenience for any transaction  since you don’t need to worry about exchanging cash and carrying a lot of cash around. So, your main transaction weapon while overseas will be your credit card. Extra credit limit might be handy as the exchange rate is changing all the time and unexpected expenses is more likely while you’re abroad.

The Risk Of having Higher Limit

• If your credit card is misused (by fraud or negligence) you might be liable of that amount. Hence having higher credit limit means higher amount that could be at risk.
• The temptation of impulse buying. Imagine if you have extra $3000 purchasing power on your pocket and you are looking at the item that you always want to buy for so long. The temptation so buy will be higher if you don’t have that extra purchasing power induced by your credit card increased limit. So, if you’re impulsive buyer, beware !
• When you are applying a mortgage/homeloan, the credit card limit will reduce your borrowing capacity. For example: if you have a total of $20,000 credit limit, then the bank will lend you $20k less.

Upgrade to Gold Card or Platinum Card?

After certain credit limit (vary from each company), the credit card issuer may no longer can offer you increase the credit limit without upgrading your card to the higher level. This is where you need to be extra thoughtful.

Upgrading to higher level (Silver to Gold, Gold to Platinum, etc) will usually involve additional annual fee. Sometimes very big different. For example: $59 per year for your ‘normal’ card and $199 annual fee for Gold card.

Of course, the company will try to sell you this upgrade by pointing you to some ‘additional benefit’ but this additional benefit usually just pseudo benefit that you will hardly use. For example: say with Gold card you are offered to have free travel insurance if you buy ticket with the card, but you hardly go overseas. Or maybe some discount if staying on certain hotel chain, but that hotel chain is too expensive anyway even with discount.

So, this illusion of “benefit” have to be clearly considered. Remember also to check with the real reason you want to increase the credit limit. If you don’t get added value, don’t bother with the upgrade.

Conclusion

Never automatically agree for any increase of credit limit or upgrade of your card. Always do your reasoning and consider the guidelines above. If still in doubt, it’s better NOT to increase.

Hope this helps.

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