Higher credit card limits – encouraging more debt?
If you’ve ever owned a credit card and been a consistently responsible user of it (in the eyes of your provider), at some stage you may have been offered an increase to your credit limit. While this might make you feel proud in the sense that the bank is recognising your creditworthiness, a higher credit card limit presents a test to your financial discipline. You’ll probably be willing to spend more each month and perhaps become a little too comfortable with higher levels of debt. While a higher limit can be more convenient (such as for large expenses), you might fall into the trap of overspending more than you can pay off before incurring interest charges.
The perils of higher credit card limits
We shouldn’t allow ourselves to become too comfortable with higher credit limits.
Aside from posing the temptation to spend more, a higher credit limit can also negatively impact your ability to get credit from another source. This is because lenders assess people’s overall credit card limits as if they are debts, no matter how often you pay off the outstanding balance in full.
For example, if you own a credit card with a $5,000 limit and apply for a home loan, the lender will assess you as having a $5,000 debt even if you’ve never used the credit card.
So, think twice before accepting or applying for a higher credit card limit when you don’t need it.
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