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Why Lowering Your Credit Card Limit Is Not The Solution

04-Jun-2018

Samart Sinha, 28, a freelance photographer, recently reduced the credit limit on his credit card fearing he would spend more. “As I am a freelancer, I don’t have a regular income. Using my credit card too often, I realised that my spending has increased considerably. I am repaying it, but fearing that I would get into a debt trap, I reduced the credit limit to Rs1 lakh from Rs2 lakh,” said Sinha, adding his credit card spends were around Rs1.2 lakh a month. You may think that Sinha’s approach is right, but it is not. Here is why:

Credit limit

If you are new to credit cards, to give you a sense, a credit limit is the maximum amount you can spend using your credit card. If the credit limit on your credit card is Rs3 lakh, it means you can spend up to Rs3 lakh. The amount varies based on your profile and the company that issues the card to you. Banks usually consider parameters such as your income, repayment capacity, location and organisation while setting the limit. If your income is low, your credit limit will also be low.

“The limits on credit cards in India are not very high. Very few credit card holders will have a credit limit of say Rs10 lakh and above,” said an Axis Bank Ltd official.

Reducing the limit

Usually, credit card users look for higher credit limit. Very few cardholders want to reduce their credit limit. “Using a higher limit will anyway affect your score. If your credit limit is reduced, your utilisation of the card will increase. It will have a negative impact on your credit score,” said Hrushikesh Mehta, vice-president and head, direct-to-consumer interactive, TransUnion Cibil Ltd.

Good utilisation limit

Keeping your expenditure to 30% of the total credit card limit can be considered healthy. However, it varies depending on other parameters. “Someone who earns Rs3 lakh a month and uses Rs50,000 on a card with Rs1 lakh limit is very differently viewed than someone who draws Rs1 lakh salary and uses the same amount with the same limit,” said Mehta.

How to deal with it?

The best way to deal with it is to be prudent with your expenses. Try not to go overboard with your spending. You can limit yourself to spend up to a certain amount a month. In the process, don’t get into a revolving credit cycle, which can derail your overall finances.

Source : LiveMint

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