I was checking out at Walmart, also paying with a Walmart Credit Card Powered by Mastercard. Suddenly a message pops up, “Your credit limit has been increased to $5000,” My automatic reaction was to select “yes”. But I resisted, and selected “no”. Now that has a flashback story. I have another credit card with a limit of $9000. One-by-one, Until I realized, I had already taken a loan of $5000. That was quite a shock because I was only part-time at that time and not earning much. It took me very long to pay off that loan. I would not say that it was a totally bad idea. So I weighed the pros and cons.
Why Increasing The Credit card Limit Is A Good Idea?
Emergency Funds In Your Credit Card.
For good financial health, you need six months’ worth of emergency funds. Some emergency funds can be managed by the help of credit cards. So If you have a credit card with a higher limit, it is definitely going to help.
Path To A Good Credit Score.
Agencies calculate your credit score by dividing your debt by your credit. So if at present you owe $2000 to the Credit card company out of your $2500 limit, it will affect your credit score in a negative way. But if your limit increases to $5000, there will be more chances to get a good credit score. A good credit score means that you can get easy approval of other loans like house loans, car loans etc.
More Spending Freedom.
You can afford to make large purchases that cannot be paid in one go. For example, you can buy furniture that you wanted to buy for your new home or a laptop you wanted to buy but could not pay in full.
Why increasing the limit is not a good idea?
Higher Credit Card Limit Allures Us To Overspend.
Imagine there were no credit cards. You need money, and you have to turn to a real person for it. You will ask them a few times before feeling embarrassed, and finally, limit the needs that force you to ask for money and eventually not ask anyone for it.
Now, look at the scenario where credit cards exist. You do not have to ask, just take whatever you want and nobody will ask why. You will not be asked to return the money as long as you are giving the minimum payments. It is too easy right!! That is why we take and take and take until we realize that we have to pay all that money back too.
Higher Interest Rates.
In case you do not know, Credit card interest is calculated on a daily basis and is compound interest. Imagine you owe $2000 to the credit card. So, if your one day’s interest is $3. The next day, your interest will be calculated at $2003, not $2000. That is why, if you are a person with 0 self-control over your spending, increasing the limit can prove dangerous to your financial well being.
I am not an expert on this subject. But I think every person should take good care of their financial health as much as they take good care of their physical and mental health. After all, financial security is the key to lead a good life. Research and prepare to be aware of every aspect that contributes to your financial health and you will not repent later.
The bottom line is that you have to decide for yourself by comparing these pros and cons and act accordingly!!
Read more about the tips to save money in Canada below.