Money & Power

7 Things to Know Before You Say Yes to a Higher Credit Limit

Why do banks increase your credit limit?
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There’s a reason credit cards are called fantastic plastics—with one swipe, you can go home with the gadget you’ve been eyeing, the latest designer bag, or even a brand-new car. 

This plastic currency is accepted at hundreds of millions of establishments across the globe. It started as a payment tool mostly for groceries and gas purchases, but now, more and more are discovering the convenience of not carrying cash and relying on their cards instead. From gym memberships to tuition fees, and even liposuction surgery, you can count on your credit card to cover your spending.

But there are pitfalls too—you need to watch your spending, settle your bills on time, and make sure you are not charged fees that you did sign up for.

If you’ve been good—that is, you always pay on or before the due date—you are likely to be targeted for unique offers by credit card companies. One of them is a higher credit line, even if you did not ask for it. Before you say yes, here are some things to consider.

How many plastics do you own?
You may be like many consumers who own at least two credit cards. That’s because once you own one, it is so much easier to get a second card with credit card companies accepting the first credit card as proof of your capacity to pay. However, not all cards are equally used so you may have two or three or more, and not realize it. Check your wallet and even your desk at home to account for all of them.

Know your total credit limit.
Not everyone knows how much their actual credit limit is, especially if they don’t spend anywhere near it. Make sure to look for your limit on your credit card statement, and if you own more than one card, tally all your credit cards. The sum is your real credit limit and you must ask yourself if you really need more. 

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Check your plastic spending.
How much did you have pay last month with Credit Card A? And Credit Card B and C, if you have a third plastic? If possible, try to get a three-month average for a better idea of how much of a credit line you really need. If you have been spending less than half, you don’t need a larger credit line. In fact, you should consider giving up one of your credit cards. 

When to say yes to more.
If you’ve been spending between 50 to 70 percent of your total credit line, you can still say no as you have a comfortable buffer for travel or emergencies. However, if you are hitting between 80 to 90 percent, saying yes may be a good thing so you don’t get slapped with over-limit fees (yes, there is such a thing. When you spend beyond your credit line, your credit card issuer may approve the transaction but charge you a flat rate or percentage of purchase or excess).

Is there a rule of thumb for credit limits?
Credit card companies generally look at your monthly income and then multiply by a certain factor say 2 or 3 or 4 when assigning your credit limit for the first time. After that, they also look at your payment behavior: Do you pay in full, on time, or pay a fraction and revolve? They like it best when you pay on time, and when you settle the minimum due as that’s when interest charges kick in and they make more money from your spending.

What’s the risk with saying yes?
One obvious risk is your credit exposure. If you lose a credit card and it is used by fraudsters, you could be liable to pay for all the unauthorized spending. Imagine if you lose two or three credit cards, that’s easily double or triple the heartache.

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How do I know the credit limit I need?
There’s no one size fits all answer here. You will have to look at your lifestyle. Do you travel often? If yes, you need a buffer for hotel reservations (so you don’t need to leave a cash security deposit). Do you buy big-ticket purchases? If yes, that installment line eats into your credit limit and may leave little for everyday spending. A good formula to have is to take the six-month average of your monthly income and your monthly spending. A comfortable credit line should be double the average of your monthly income or monthly spending, whichever is higher. If the latter is higher, note this is a warning sign for your spending behavior.

Ultimately, the best rule of thumb is to spend less than what you make, which means your credit limit should be something your income can cover with some room for savings too. Don’t make the mistake of thinking you can spend the sum of your income and credit limit—there lies the path to financial disaster.

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Aneth Ng-Lim
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