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Many people do not fully understand what credit limit means. We all possess credit cards - some of us in different classes (gold, platinum etc) and yet we could not care less about our credit limit. We just load the card and go on a shopping spree until the card is maxed out.
Imagine this.
A man takes his lady out on a date and they have a good time. By the end of the date, the guy whips out his card and gives it to the waiter to take care of their bill. After a few minutes the waiter returns with a solemn look on his face to report that the card is not working. He remains calm and produces one card after the other but is met with the same tragic conclusion every single time.
This scene is played out in more movies than I care to remember and we have a good laugh whenever we come across such a scene. But the truth is that it is nothing to laugh about. Besides being a sign of financial laziness, it hurts much more than just your ego. By doing this you are just building a terrible financial record for yourself.
It makes sense to argue that one will not experience such an embarrassing situation if he/she had a proper understanding of his/her credit limit.
So what is credit limit?
Put simply, it is the most that a credit card company will allow a cardholder to take out on a credit card at once. The credit is dependent on a variety of factors like an individual's ability to make interest payments or a company's cash flow or ability to repay the credit card debt.
The typical solution to this problem is to raise your credit limit (the maximum amount of money you can spend on the card). But before you do this, read on to see some of the benefits of raising your credit limit.
1. You get a higher credit score
The way you spend money using your credit card will determine the rise or fall of your credit score. It is obvious that getting a higher credit limit means a higher spending potential. However, the worst thing that can happen to your credit rating is to max out your card (spend up to or exceed the credit card limit).
To help your credit score, make sure that you never spend up to the credit limit of your card. Pay close attention to your debt to credit ratio. For instance if you have a $3000 credit limit and always end up with a monthly bill of around $2850, you are using 95% of your available credit. This means you are taking a major hit on your credit rating even if you have a perfect payment plan.
However, if you can get a credit limit increase to say $4500, your debt to credit ratio lowers significantly, and this will result in a higher credit score.
2. Makes it easier for you to access loans and additional credit
If at the end of every month the amount of money you spend is not up to half of your available credit, you are creating an image of financial responsibility by which the credit bureaus judge you. This will result in an increase of your credit score.
This habit of financial responsibility will make you more appealing to potential creditors. You will have access to more credit after extending your limit. It will also be easier for you to access loans, mortgages etc.
3. You enjoy increased convenience
If you are the type who makes big purchases on your credit card, having to frequently pay down the balance to be able to keep using the card can become very tiring, very quickly.
It is especially painful when you have to wait one or two business days for the transaction process to be completed. Imagine the type of damage that waiting period will do to you if you want to order some time sensitive items for your business.
Raising your credit limit frees you from worrying if your credit limit will hold up while you make all your necessary purchases.
4. Makes money available to you in case of an emergency
Remember the picture of the movie scene I painted earlier? Having a credit limit that is well above your spending power will ensure that you are never out of cash in emergency situations.
Life - at one point or the other - will hit us with situations that we did not financially prepare for. It could be anything from vehicle breakdown and a house fire to medical bills and emergency business travels. Whatever the case, a higher credit limit helps to make sure that you are always going to be able to wriggle free when pushed into a tight corner.
Hopefully though, you will have an established emergency fund so that you will not always need to depend on a large line of credit to bail you out of every emergency situation.
5. Increases your rewards potential
People who spend heavily on their credit card increase their potential to get some serious reward points or cash back. Using a debit card or cash in lieu of a credit card means that you might be missing out on these rewards.
Now, I am not saying that you should go into a spending frenzy on your credit card because you want to get the rewards or some of your cash back. But if these are payments that you cannot ignore then by all means use the card. With a higher credit limit you will be able to buy more which will also increase the rewards that accrue back to you.
While the benefits mentioned above may sound all rosy, it is important to exercise caution when handling financial matters like this. Remember to check your creditors policy before asking for your credit limit to be raised. Also, ensure that you always have enough money stashed away in a bank account that can pay off the balance on your card especially if you make significant monetary transactions with it.