Credit card limits: Striking the right balance for financial health

Proper management of your credit card limit is crucial in maintaining good financial habits and avoiding excessive debt. As a financially mindful consumer, it is important to find a balance between utilising your credit card and practicing responsible spending. Going over your credit limit can have negative consequences on both your savings and credit score. To help you navigate the world of credit cards, this article provides tips on choosing and managing your credit card limit, allowing you to reap the benefits while minimising potential risks.

The importance of responsible spending
 

Responsible spending goes beyond simply avoiding debt. It's about being mindful of your financial resources and making informed choices about where and how you spend your money. Responsible spending helps you:

• Gain control over your finances:
  
  

  Plan expenses and stick to a budget to minimise impulsive purchases and unnecessary debt.

• Build a healthy credit score:
  
  

  Timely payments and controlled credit utilisation are key contributors to a good credit score, unlocking favourable loan rates and financial opportunities.

• Achieve financial freedom:
  
  

  Responsible spending facilitates saving for future goals, establishing an emergency fund, and ultimately attaining financial security.

Understanding credit card limits
 

Every credit card has a credit limit – the maximum amount the card issuer allows you to spend. This limit depends on several factors, such as:

• Income:
  
  

  Lenders look at your income to determine your ability to repay your debt.

• Credit history:
  
  

  A good credit history demonstrates your financial responsibility and can get you higher limits.

• Overall debt:
  
  

  Existing debt obligations might lower the limits you are offered.

Potential risks of exceeding credit card limits
 

Exceeding your credit card limit has serious financial consequences, negatively affecting your credit score and finances. Consider these risks:

• Increased interest rates:
  
  

  Issuers often impose penalty APRs (up to 30%) when accounts regularly exceed limits, significantly raising the cost of purchases and debt.

• Fees and penalties:
  
  

  Over-limit fees, late fees, and other penalties can accrue for limit violations. These charges quickly accumulate.

• Lower credit score:
  
  

  Maxing out cards or exceeding limits indicates high credit risk, potentially lowering your credit score by up to 100 points.

• Reduced available credit:
  
  

  Your credit utilisation ratio rises when your balance surpasses your limit, adversely impacting your credit score.

• Difficulty getting approved:
  
  

  Lenders perceive overspending as a red flag, potentially hindering approval for loans or new credit cards.

• Debt trap:
  
  

  Excess spending and high interest can make balances tough to pay off, creating a harmful debt cycle.

Tips for choosing and managing credit card limits wisely
 

Here are some credit card usage tips that you need to keep in mind:

• Select a limit aligned with spending habits -
  
  

  Establish a credit card limit based on your budget and needs. A too-high limit tempts overspending. Start with a manageable limit to build responsible habits.

• Choose low-interest, no-fee cards -
  
  

  Reduce costs by opting for cards with low interest rates and no annual fees, especially if you might carry a balance.

• Prioritise on-time payments -
  
  

  Demonstrate responsible handling of credit by making on-time payments each month.

• Pay above the minimum -
  
  

  Paying more than the minimum saves on interest and reduces your balance faster.

• Avoid maxing out your card -
  
  

  Utilising more than 30% of your limit negatively impacts your credit score.

• Request periodic limit increase -
  
  

  Demonstrate improved management of higher limits over time with requests for increases.

• Consider lowering your limit -
  
  

  Request a temporary reduction if necessary to curb overspending during financially challenging periods.

• Consolidate balances -
  
  

  Simplify multiple card payments by consolidating balances onto a card with a lower limit.

• Set account alerts -
  
  

  Utilise alerts to inform you as you approach your credit limit, allowing proactive spending adjustments.

• Regularly review statements -
  
  

  Track spending patterns and make adjustments as needed to habits and limits.

Strategies for balancing credit card limits and expenses
 

Here are the strategies for balancing credit card limits and expenses -

• Set a budget -
  
  

  Having a fixed monthly budget in mind is vital. Make a note of your monthly income and the expected expenses. Allocate a budget for the expenses you intend to make via your credit card. By setting a realistic budget and abiding by it, you can successfully avoid overspending your credit card.

• Track your expenses -
  
  

  To ensure abidance to your set budget, it is vital to track your expenses. If you make several transactions daily, you can always use an expense tracking application to help you record all your expenses and review them whenever needed.

• Plan your purchases -
  
  

  It is easy to fall for sales tactics and make impulse purchases. But, to achieve complete financial freedom, it is important to plan your purchases and execute them in an orderly manner. Impulse purchases can make you overspend your budget and credit limit.

• Request a lower limit if needed -
  
  

  If you find yourself tempted to overspend your current limit, request that your bank lower it to an amount you can more easily manage. This can help reinforce better spending habits.

• Pay your bill on time -
  
  

  Monthly timely bill payments ensure your credit utilisation ratio stays low. This helps improve your credit score over time.

• Avoid cash advances -
  
  

  Cash advances usually have high interest rates. It is prudent to avoid using your credit card for cash advances as it can increase your outstanding amount and interest costs.

• Consolidate high-interest debt -
  
  

  If you have accumulated debt on multiple credit cards, consider consolidating them for one with a lower interest. This can simplify repayment and reduce overall interest costs.

• Build an emergency fund -
  
  

  Having 3-6 months of living expenses in an emergency fund helps handle unplanned expenses without using credit cards. This prevents overspending.

• Review and adjust limits -
  
  

  Check if your limit exceeds your monthly spending needs. Opting for a lower limit helps curb overspending. However, avoid maxing out cards.

• Seek help if needed -
  
  

  If credit card debt becomes unmanageable, seek help from a financial advisor or a debt counsellor to get back on track.

A word of caution
 

Understanding and managing your credit card limits are crucial for financial health. IDFC FIRST Bank offers multiple credit cards to suit your spending style. Carefully review the terms and conditions of each card before choosing the one that aligns with your goals.

To explore the exciting IDFC FIRST Bank credit cards, click here. 





Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute fGain control over your finances:or specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.