If you are using a credit card, you must be enjoying the loads of financial benefits that it offers to you. If you are paying the total outstanding bill every month by the payment due date, you must also be loving the interest-free period of close to 2 months that you get on your credit card expenses.
Another aspect of the credit card that you are likely to be aware of is the reward points program and the benefits that it brings to you. However, if for some reason, you are considering a decrease in the limit on your credit card, you should reconsider your decision as this is not the best thing to happen to your credit card account.
The reasons why it’s better not to get your credit card limit reduced are listed below.
A high credit utilization ratio: Credit utilization ratio is the percentage of credit limit that you use. It can be calculated by dividing the total spends on the credit card during any billing cycle by the total limit on the card. The credit utilization is very important because it has a major impact on your credit score.
Ideally, your credit ratio should be below 30%. But if you reduce the credit limit on your card and spend in the same way as you did before the reduction, your credit utilization would rise.
Its rise would mean that your credit score, an important factor to secure loans, would plummet. Alternatively, you also deny yourself the chance to build a strong credit report by maintaining a low credit ratio.
Fewer rewards: Most credit card issuers offer multiple attractive reward points program that gives you reward points for transactions carried out with the card. The accumulated reward points can then be redeemed for attractive gifts and other options.
A low credit limit implies a lower capacity to spend with the card and therefore a low number of accumulated credit card points. Thus, you miss out on the attractive credit card rewards that your card can offer.
Reduced spending power: This would be felt particularly during emergencies when you would be in need of some extra money to make that important transaction. This is one of the potential hazards of getting your credit limit reduced.
You should be sure that reducing the credit limit doesn’t affect your purchase power to buy important articles and services.
Before deciding to request your credit card issuer for a drop in the card limit, you should be certain about the reasons that are pushing you to take this step. If overspending with the card is your concern, you should exercise strict self-control and constantly remind yourself that you need to pay back all the expenses at the end of the billing cycle.
If you are worried that a high credit limit would mean a high loss during the unfortunate event of credit card fraud, you can take extra care of the transactions that you carry out with the card. Use it only on secured websites and never disclose the card details to other individuals.
Your credit card can prove to be a great financial tool for you if it is used smartly. Just pay your card dues on time and refrain from impulsive purchases. It’s not a great idea to get your credit limit reduced as multiple and potentially negative consequences are involved as listed above.
Therefore, it would be best to try out other available options to tackle the problems that are making you consider a lower credit limit.