4 Factors to Consider While Upgrading Your Credit Card

You get a call from your bank. The executive tells you, “Since you are a privileged customer, we are offering you an upgrade on your existing credit card.” Such statements invariably massage your ego. Who does not want to be recognized as a privileged customer? In addition, you are getting better benefits and a higher credit limit. You do not see anything wrong. You happily agree to the upgrade.

The credit card upgrade could be offered in two ways.

1. You could be offered a higher credit limit.
2. You could be offered a different (premium or so will it be called) card. Premium card, typically, have higher credit limit too.

The banks offer such upgrades based on your good repayment history and credit behavior. If you get a higher credit limit and better rewards, then upgrading your card is a no-brainer. However, there are a few aspects that you should still keep in mind before you agree to upgrade.

1. Credit Score

This part is important. As I understand, Credit bureaus such as CIBIL give importance to credit utilization ratios while calculating your credit score. Lower utilization ratio shows reduced dependence of credit and hence a positive impact on credit scores. If your credit limit on the card is Rs 1 lac and you regularly utilize the limit up to Rs 60,000, your credit utilization is 60%, which is a bit on the higher side. If your credit limit is increased to Rs 3 lacs, the utilization ratio will only be 20%. A lower credit utilization ratio should have a gradual positive impact on your credit score. A good credit score always helps. As discussed in many of the earlier posts, a good credit score will not only increase your chances of getting a loan approved but you may also be eligible for a lower interest rate. Therefore, if you have been planning to take a loan in the near future, you could benefit from a higher credit limit.

2. Better Rewards and Deals

If the bank is offering you a new card, it must have better benefits as compared to your existing card or else there is no reason you will switch. The new card may offer you airline miles, discounts at greater number of stores, restaurants and hotels. You may even get better deals from the bank in your inbox. It may be easier to earn reward points in the new card. The bank may have analyzed your spending pattern to assess that a different card is better suited to your needs or that you may spend more on this new card. Yes, banks make money when you swipe credit card. If you have been a responsible borrower, why wouldn’t bank love to give you a higher limit or a premium card?

By the way, make sure that the better deals exist. It is possible that the executive may over-commit about the features in order to get you to sign up for the card. We all know there are a few conditions to be met before you get the rewards. For instance, you might be told that you will get 10,000 bonus rewards points every year. What may not be told that you will need to spend Rs 5 lacs in the year on the new card to be eligible for such rewards. Get everything in writing over e-mail. Go through the terms and conditions of the new card.

3. Fees

A credit card upgrade may come with an annual fee. This will happen if you are shifting to a new card. The bank executives may try to convince that its features, rewards and freebies are worth it. You must do a cost-benefit analysis. You need to see for yourself if you will be able to utilize those benefits. If you don’t travel much, those extra airline miles and access to lounges to airport may be meaningless for you. If you do not own a car  and use public transport, cash back or reward points for making payments at a petrol pumps may not be any use. Moreover, if the bank is so keen on upgrading your card, negotiate hard. You can ask them to waive off the entire annual fee or at least good part of it. It is also possible that the executive intentionally does not touch upon the topic of fees while pitching the card to you. However, it is your duty to enquire about the charges. Since the communication is directly from the bank, ask them to drop an e-mail about the fee and charges for the new card. Verify the details on the bank website too.

4. Hike in Expenses

This is a caveat. Just that you have a higher spending limit does not mean that you should start spending more. Such behavior may be detrimental to your long term financial health. Many times, deals are structured in such a way that you may be inclined to spend more. For instance, a deal could be such that you have to spend Rs 1,000 or more six times a month on department stores or restaurants to earn 1000 bonus rewards points. In such cases, you may be inclined to spend more just to get those rewards points. Those rewards point may not much value per se, but banks play these little tricks with our minds. Do not forget you are merely borrowing money from the bank. You have to pay it back in the next few weeks. There is nothing wrong in getting a higher credit limit or a premium card. However, do a bit of due diligence before you sign up.