If you are a credit card holder, you would have come across offers by your credit card issuer for an upgrade or a credit limit enhancement. Sometimes, credit card holders themselves consider going in for an upgrade or a limit enhancement by making a request for it. While this enhancement or upgrade may come with many benefits, these are not without risks. Rather than blindly accepting these offers or requesting an upgrade, you must first understand its implications and then decide if it will be beneficial to you or not.
Latest from the Election Surpirse
A card issuer offers any upgrade or limit enhancement only when you have a sound record of card usage and repayment. “A credit limit enhancement or a credit card upgrade usually is offered by banks on the basis of your recent credit history, in general, and, in particular, the performance history on that bank's existing credit card. It can also be given when the bank perceives that your income levels have increased,” says Rishi Mehra, CEO, Wishfin.com
An offer of upgrade or enhancement from the card issuer is an indication that your credit profile has improved. “To the consumer, it gives a sense of accomplishment when a bank makes such an offer. However, one should weigh the pros and cons before accepting such a request,” says Mehra.
Does an upgraded card offer a better deal?
The rate and range of rewards, cashbacks, privileges, discounts and deals are higher and better when you go for a credit card in a higher category.
So does an upgrade help get higher rewards, cashbacks and other benefits if certain expenses are made using the card? “Yes, it can help in higher rewards and cashbacks among other benefits,” says Mehra.
People who hold on to their old cards despite being eligible for an upgraded version may lose out on many bargains. “An outdated credit card may not give you the latest features or benefits. Most credit card issuers these days offer eligible customers free quarterly access to airport lounges as well as enhanced credit limits, cashbacks and discounts on every transaction. If you continue to use an outdated card, you are likely to lose out on new and added benefits you become eligible for when you pay your bills on time,” says Adhil Shetty, CEO, Bankbazaar.com.
How a higher credit limit influences your finances
When it comes to credit score, credit bureaus tend to consider more favourably those who spend lower than the credit limit. “Credit bureaus calculate credit scores based on various factors. Credit utilisation is one of key parameters. A lower CUR (credit utilisation ratio, which shows how much percentage of available credit limit you use) indicates responsible credit management and demonstrates that you are not heavily reliant on credit. This can have a positive effect on your credit history,” says Shetty.
A credit card with a higher limit but with a spend that is inline with previous spending will help you bring down the credit utilisation ratio. “For example, if monthly spending on your credit card is Rs 50,000 on a credit limit of Rs 1 lakh, it means your CUR is 50%. But if your credit limit is Rs 170,000, then 30% CUR would be Rs 51,000 per month. As per your spending, you can maintain your credit limit and spend accordingly,” adds Shetty.
If you are having an average credit score between 700 and 750, a higher credit limit may help you. “For an average score customer it may help to get above 750 and to a customer who score is high will remain there only,” says Mehra.
Shetty says a low credit utilisation ratio not only helps in getting credit but also reflects positively on your overall financial health. “It indicates that you manage your finances well and are less likely to default on payments. Responsible credit behaviour, timely payments and a balanced credit mix are essential aspects of maintaining a good credit history,” he says.
Risks of having higher credit limit on your credit card
The biggest risk of a higher credit limit is overspending. “Limit enhancement can create an urge to spend more, which might lead to higher interest costs if the dues are not paid on time. It will deplete the credit score. There is also a risk of higher amounts of fraud transaction if the security of such a card is compromised,” says Mehra.
The very benefit of a higher credit limit will soon turn against you if you are not careful with your card usage. “One of the primary risks is the temptation to overspend or impulsive spending. Overspending can also stretch your CUR, which can squeeze your credit score. If your spending needs are higher, you can opt for a higher credit limit to avoid exceeding the CUR level of 30%. But regardless of the limit, disciplined usage is required along with timely payments,” says Shetty.
How to decide whether to accept an upgrade or enhancement offer
When your credit card issuer has offered to upgrade or enhance your limit, you must minutely review your finances and spending pattern. “Such a request should be accepted after considering factors like higher disposable income, is the card offering best-in-class rewards on user specific category spends, security features, easy availability of credit from other bank’s basis your current credit score and health, and whether the user is prudent enough to maintain financial discipline or is an impulse buyer,” says Mehra.
Your option is not limited to your current card issuer. A good credit profile can help you get a better card from other issuers as well. “If you believe that the offered credit card upgrade or limit enhancement aligns with your financial goals, suits your spending patterns, and provides more benefits, then accepting the offer could be a wise decision. However, if you find that the offered terms do not meet your needs, it may be best to explore other credit card options that better suit your requirements,” suggests Shetty.
You must check the annual fee and whether your spending pattern and annual benefit will be much more than that. “It is crucial to assess that credit card upgrades may come with additional features and benefits, but they may also have higher annual fees. Therefore, before opting for an upgrade, evaluate whether the added benefits outweigh the increased costs. Consider if the features align with your spending patterns and financial needs,” says Shetty.
When should a customer go for an upgrade or enhancement of limit?
When there is no offer from the credit card company but you think that you deserve a better card, you can request for a limit enhancement or an upgraded card. If your income has significantly increased since the time you took the credit card, going for a higher limit makes sense. “If the income has increased, a customer may be eligible for a credit limit enhancement. Customers with a long-standing relationship with the credit card issuer may be in a better position to request an upgrade or credit limit enhancement. Some of these benefits are pre-approved for eligible customers,” says Shetty.
You need to assess your spending pattern and then decide about the upgrade and limit enhancement. Mehra suggests that an upgrade or limit enhancement should be requested only if income levels have gone up, followed by an increased spend or a likely higher spending in the near future in the usual categories (grocery, fuel, etc).
A person’s spending pattern may change over a period. Such cases call for a change in the card or the terms of the card. “The user can also request for an upgrade when there is an inherent change in benefits provided in the existing card and that doesn’t suit your spending styles now. For instance, a bank decides to discontinue a card and replaces it with another card but it might not have any perceived benefit to you now. Ask for an upgrade in such a case,” advises Mehra.
The first thing to check for the right card fit is whether the upgraded card suits your spending behaviour or not. “It would be prudent to check whether the benefits offered with an upgrade suits your current spend categories or it just offers lucrative rewards on spends which you don’t incur currently and are not useful for your current spend categories,” says Mehra.
How to make the best of enhanced limit or upgraded card?
The best way to evaluate a credit card is to calculate the rupee value of all the benefits that you will get after reaching a particular level of spending in various categories in a year. An upgraded card with a high annual fee may come with an opportunity to reverse this fee. “You must check and evaluate your annual, quarterly and monthly expenditures before accepting the upgrade offer. Many credit cards come with an annual fee, and some issuers offer to waive or reverse this fee if the cardholder meets a certain minimum spending threshold within a specific period,” adds Shetty.
