What is a credit limit?

If you are not aware of the term 'credit card limit', it is the maximum amount per month that your bank allows you to draw from them using the card, without extra interest charges.

The limit is set based on your income, credit history, repayment capacity, job type, location and other related parameters. Generally, a higher income will result in a higher credit limit and vice versa.

If you have a monthly salary of Rs 50,000, a credit limit of Rs 2 lakh and you feel that you should be reducing it to say, Rs 1 lakh to help you spend less and not max-out on the limit, then here's why you shouldn't do it:

It will hamper your credit score

A higher credit limit is always an indicator of a good credit score. Credit scores are mainly based on your capacity to spend and repay the money you borrowed within the interest-free period. A sign a good money management.

It will not help you spend better

As mentioned before, credit scores are based on your money management skills. To take the example, if you happen to reduce your credit limit from say Rs 2 lakh to Rs 1 lakh and use it completely, it is still not easy for you to repay the amount with a Rs 50,000 salary. You will have to change the way you spend, and limit your spending on expensive things.

Spending-percentage pattern changes

So if you were spending only Rs 50,000 out out of the Rs 2 lakh, it comes to 25 percent, whereas with a Rs 1 lakh limit, it will be 50 percent. Experts say that 30 percent of the credit limit usage is always healthy. So with a higher limit your share of the 30 percent will be bigger.

Will help with emergencies

One of the basic purposes of a credit card is emergency spending or the ability to get an expensive asset in installments. With a higher credit limit, you will be able to buy that latest smartphone you always wanted and make a purchase of the washing machine spare part that stopped working all of a sudden. This way you can manage your finances in emergencies and for planned purchases.

Conclusion

Do not get trapped into the endless cycle of credit card repayment where you make unnecessary purchases to repay from the salary you haven't received it. Utilise it rather to make planned purchases. Your aim should be to increase the credit limit and not reduce it. This will help you take a bigger loan for a concrete purchase in the future, like your dream house or a car.