When less credit is more..

“Good morning sir! We have a special offer for you," says a voice at the other end of the phone.

"We can increase the credit limit on your existing credit card. It's absolutely free." Sounds familiar? Telemarketers may try to lure you into increasing your credit card limit.

But don't jump into the fray. First ask yourself two questions:

1. Do I really need it?

Atul Khanna's existing credit card limit is Rs 75,000. His average spending for the last 12 months was Rs 4,000 to Rs 5,000. He was offered a new credit card limit of Rs 1,50,000.

"When I am not even using even 10% of my existing limit, why is the banker increasing my limit?" asks Atul.

Moral of the story: Check your financial requirements rather than the increased limit.

Remember, when offering higher credit limits, banks are thinking more of their business rather than your financial needs. They offer higher limits to pamper customers. Higher limits also induce customers to spend more.

More spending by a customer means more business for the bank. And finally, in case the customer spends large amounts and then defaults, banks can make merry with the penalty and penal interest.

So, don't jump to take up the offer fearing it might never come your way again.

2. Should I be lured by freebies?

Sometimes, an increase in credit limit comes along with added benefits like travel insurance, free access to airport lounges and other facilities, few banking services at no cost (free pay order at door step) and so on. Ask yourself if you really need these.

When you really need a higher credit limit

1. Prove your credit worthiness: This is a fundamental thing that banks will look at.

2. If you have many credit cards, regularly use the one for which you are seeking higher credit limit.

3. Pay the outstanding amount without default. Never look at only making minimum payments.

When increasing your credit limit is a bad idea

The author, Ketul Shah is a Chartered Accountant and MBA specialised in banking, finance and insurance. Write to him at [email protected]

Disclaimer: The contents of the article or are for information purpose only and are in no way meant to be advisory in nature. The author does not claim responsibility for actions taken by readers on the basis of the Article. Please consult your financial advisor for your personal money management.