“I would like you to enlighten me about the credit limit increase offers. I sometimes receive this offer in the mail from the company I have a credit card from. My credit limit is $2000 and I rarely go near it. So I don’t see why I would increase it. What are the advantages? The disadvantages? The issues? What should be assessed and monitored? » writes Anne-Marie, whose questions resonate with many Quebecers.
Define the need for credit limit
A higher credit limit could benefit Anne-Marie if she is planning a large purchase whose value exceeds her limit of $2,000. The credit card with a higher limit is also an advantage if it is used to pay for large unexpected expenses, especially if cash is otherwise available to pay the balance in full.
Additionally, if our reader wants to improve her credit report, she can do so by increasing her limit and demonstrating her ability to manage her debts. Remember that your need for the credit limit should not be established based on the offers received, but based on a good knowledge of your average monthly cost of living and your needs for major purchases.
As for the disadvantages, the main one is that an increased credit limit creates the illusion of greater purchasing power. Purchasing decisions are often made in a more emotional, less rational way. Depending on the consumer’s personality, access to credit can therefore represent an increased risk of debt.
In short, beware of the feeling of pride when your institution offers you such increases. Its objective is not to recognize your good borrower profile, but to generate profits. Additionally, the accepted credit limit influences your ability to make other loans. Therefore, Anne-Marie should consider her personal plans before accepting such an offer, such as future mortgages or car loans.
Credit limit and score
The credit limit is that which has been granted by the lender, while the available credit is that which remains with the borrower based on the current use of this limit. If Anne-Marie has a relative goal to maintain or if she wants to obtain a favorable credit score, she should know that this amount does not necessarily have to be very high.
Rather, it’s the utilization ratio — or the portion of the credit you use in relation to your card’s credit limit — that is the key factor to take into account. Indeed, a high rate will be interpreted as a sign that may indicate potential difficulty repaying the credit card balance. So, a high utilization ratio can lower your credit score and cause lenders to take additional risk into consideration. In theory, you should aim for a credit utilization ratio of 30% or less.
So, as curious as it may seem, even if our reader does not demonstrate a need for an amount greater than $2000, if she regularly used it to its maximum capacity, she would benefit from increasing the limit to one amount of $5000 to $6000 without increasing its use.
Danger on the horizon
Current data shows that credit card financing has exploded in Canada since 2021. Outstanding balances on credit cards increased by more than 13% between the second quarter of 2023 and that of 2024, according to Equifax. Therefore, it appears that the danger of indebtedness, increased in many cases, will have to be considered in such a decision. Between an excellent credit rating and a healthier financial balance sheet, in my eyes, the second possibility wins without question.
In conclusion, When we ask ourselves whether the credit card is bad debt or not, it is actually a false question: in theory, the credit card East a means of payment, not financing. Discretionary consumption or consumption of non-durable goods should only be paid by this means when the balance can be repaid in full, on the date indicated on the statement. You will tell me that these are basic tips. The statistics show that we must continue to teach it.
