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Pros and cons of increasing your credit card limit

Pros and cons of increasing your credit card limit

An increase to your credit card limit can come in very handy, but also comes with potential risks. Here are some things to think about before raising your limit.

Having more space on your credit card can sometimes come in handy if, for example, you’re planning a big overseas holiday or to purchase a major household appliance, but don’t have time to save the cash. But uncontrolled spending on high-limit credit cards also comes with risk, so it’s important to know your own limits and manage your spending.

Possible benefits of raising your credit card limit

One obvious advantage of upping your credit card limit is that you instantly have access to more funds. Also, many credit cards provide interest-free periods of up to 55 days, which, provided you repay your full balance within that time to avoid interest, can be a useful tool to help you maximise your cash flow.

Paying for day-to-day expenses on your credit card and taking advantage of the interest-free period will mean that funds you’ve set aside to cover these purchases can be working for you – perhaps in a savings account with bonus interest rate, or home loan offset account.

In the meantime, you can take advantage of the benefits of using your card for purchases, such as any rewards program that may be linked to it.

Possible risks of raising your limit

The higher the limit you have on your credit card, the more you might be tempted to spend – which may not be a good idea. Having a lower credit limit can reduce the temptation to spend more money, while still providing a borrowing safety net.

As well as higher credit card bills and interest payments, another possible risk of increasing your limit is that it can also impact your ability to get credit elsewhere. A request for an increased limit may appear on your credit report and reduce the amount of credit that another institution is willing to extend to you.

Most lenders typically look at your credit card limits when deciding how much they would consider offering to you as a loan. Your actual outstanding credit debt is not the issue. A higher limit means they may offer you less than you were hoping or even knock back your application altogether.

So even if you only owe, say, $500 on a $10,000 limit credit card, you’re still likely to be deemed a higher risk than someone who owes $1000 on a $5000 limit card.

Are there other options?

Before committing to any credit card limit increase, it’s important to fully understand your own financial situation, as well as reasonably anticipate your likely future spending patterns based on current and past behaviours. Obtaining your credit report can also be a smart move to better understand your situation before contacting your card issuer about your limit.

An online resource such as the CommBank budget planner can help you work out how much money you’ll have available each month to make credit card repayments, as well as set a timeline for repaying all your debts.

Existing credit card customers can set a spending cap and increase or decrease their limit in NetBank or using the CommBank app.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.