Your bank calls you and offers to increase your credit card limit or upgrade you to a premium card. I am sure many of you have experienced this situation. A happy situation to be in. Usually, it is good to have a choice. Should you accept such an offer? Well, there is no black and white answer to this question. Your choice will depend on your expense pattern, credit requirements, credit discipline, and the card features. Let us look at the pros and cons of accepting a higher credit limit or a premium card.
Let us start with the benefits first.
- More credit means greater flexibility. That is a given. A higher credit limit allows greater freedom to spend and tide over short term cashflow mismatch. You might be able to manage your cashflows better.
- Better credit score: Credit utilization ratio (CUR) is one of the determinants of your credit score. A high CUR affects your credit score adversely. A higher credit limit can help there. For instance, if your total credit limit is Rs 1 lac, monthly spend of Rs 50,000 is 50% CUR. However, the same monthly spend of Rs 50,000 is only 25% CUR on the credit limit of Rs 2 lacs. Thus, a higher credit limit can help on this front.
- Better Rewards: A premium card usually comes with better reward structure. You might earn more reward points for the type of spends you make. Or you may just like the rewards more. For instance, you might get a few free air tickets every year. Or discounts at your favourite restaurants or your preferred shopping sites. So, if you like to travel, you might like free air tickets more than expensive pens or shopping vouchers.
Now, to the disadvantages.
- You might spend more. You have got to be more responsible. Higher credit limit is not a freebie. You must return to the bank what you have spent. If you start spending beyond your means just because you have a higher credit limit, you will soon find yourself in trouble. If you do not make payments in full and on time, you could pay hefty interest on the outstanding amount and/or lose interest-free credit period on subsequent purchases.
- Higher cost: The premium card may come with a fee. If you have a basic card with no fee, any fee is an additional cost. While the premium card may offer better rewards, you need to see if you will be able to earn and utilize those rewards well. You must weigh the benefits against the cost involved.
- There might be incentives for spending more. Usually, the bait is, if you spend 3-4 lacs on your card, the annual fee will be waived off. Or you might get additional benefits. Well, you might have a spend pattern that the premium card may reward better than the existing card. However, spending Rs 2 lacs unnecessarily on a card to earn rewards worth Rs 10,000 is not a wise decision.
- Rewards can be tricky. If you must first spend more to utilize rewards, then it is a double trap. First, you spent a lot of money just to earn those rewards. Then, you must spend more to utilize those rewards. For instance, you spend Rs 4 lacs on the card to get Rs 10,000 discount vouchers on 5-star hotel stays. Once you have the discount voucher, you must spend more to use those vouchers. And you must use the vouchers in a particular way where you get this discount on the full price. You might get similar discounts from the aggregator portals like Goibibo and MakeMyTrip without any expense commitment.
- Frauds will cost you more. A fraud on a card with credit limit of Rs 50,000 can set up back by a maximum of Rs 50,000. A fraud on a credit card with limit of Rs 2 lacs can cost you Rs 2 lacs. By the way, there are ways to reduce the chances and impact of fraud. Be more vigilant. Exercise discretion about where and how you use your credit card. Set transaction limits. Even then, if the fraud happens, report to the bank quickly. The sooner you report, lower your liability.
You must think about this from the bank’s perspective too. By offering you a higher credit limit or a premium card, they are not indulging in charity. For the banks, this is business. When you were a new customer, they played safe and offered you a lower credit limit or a basic card. Now that they have observed your good credit behaviour, they can trust you more and want you to spend more on their cards.
Why? Because the more you swipe or use your credit card, the more the banks earn on the transaction charges. And if you do not pay on time, a higher outstanding earns more interest. Additionally, with premium cards, there is subtle ego massage involved. You are more likely to use a premium card (compared to basic cards) while making a purchase. Thus, by offering you a premium card, the bank wants you to spend on its card than on cards from other banks.
From your perspective, if you have an offer to increase credit limit or upgrade to a premium card, do not just jump in. If you are a responsible borrower, the decision about a higher credit limit is relatively easy to make. But yes, you must manage the risk of fraud. With premium rewards, things get more complicated with complex rewards structure and contingent fee waiver. Assess the value added and weigh against the cost.