Managing your credit limit–It's all about trust and control

Credit limits – It's about trust

Credit cards offer you the power to borrow money with flexibility and gain all the benefits of cashless transactions. Credit limits or the maximum balance you can have on your credit card will restrict how much of this flexibility you can stretch.

An increasing credit limit can be beneficial to your financial health because it tells different financial institutions what you are like as a borrower. It provides you with more borrowing power and a more flexible source of funds. But while getting a higher credit is almost always a good event in your financial life, there are three important points to consider:

• Your credit limit is determined by good paying habits, not wealth.
• Honest and thoughtful observation of personal spending habits is a necessity.
• You have the option to increase or decrease your credit limit.

The credit limit is not a status symbol

Many Filipinos think that having a high credit limit is a status symbol. There’s some truth to that in some ways, since it creates the perception of your ability to repay a large sum. But more than anything, your credit limit is a picture of your financial maturity. Having a high credit limit doesn’t automatically mean you’re wealthy, it just means you can borrow more. If you have a high credit limit but you overspend and all your installments add up, then you’re just setting yourself up for a pile of debt.

There are practical reasons for having a high spending limit. For instance, it can be a lifesaver in emergency situations, whether they're home-related, health-related, or extended family related. If you don't have a solid rainy day fund that you can tap for unplanned expenses, a higher credit limit gives you leeway to cover unanticipated bills without damaging your budget or monthly cash flow.

While maxing out your credit limit may provide short-term relief, it can cause long-term financial issues such as added fees and debt. It can even damage your credit score (three-digit number that determines your ability to pay off a loan). The best practice is to maintain a low credit utilization rate (anything below 30%) as it is one of the factors to help you achieve a healthy credit score. Given these, it is advisable to avoid maxing out your card and spending near your credit limit.

Keep in mind your credit limit is first and foremost an indicator of your financial responsibility. It's not a social status or a means to improve your credit score. Those are added benefits you can do without. Growing your credit limit is about achieving greater financial freedom and fine-tuning the way you handle your disposable income.

Trust goes both ways

When it comes to improving your credit limit, trust is managed two ways: by the bank and by yourself. Yes, the bank will attempt to know who you are before they increase your credit limit but it’s more vital that you know yourself first. After all, the final say comes from you.

Self-control is a tricky thing but it's a skill you have to master before increasing your credit limit. The larger your credit limit, the bigger your potential to fall into a false sense of security. There's a chance you'll be tempted to spend more than your actual means and that habit can quickly lead to a pile of installments and an overwhelming amount of debt.

Managing your credit limit all boils down to good paying habits. If you strictly monitor your finances and follow through with your credit obligations, then you can request for a higher credit limit and leverage its benefits. And even if you're sure you can get a higher credit limit, thoroughly evaluate your reasons for wanting an increase.

Taking Control of Your Credit Limit

Managing your credit limit isn't just about increasing it, you can decrease it too. To keep increasing your credit limit is not the goal – it's about being financially responsible and finding ways to limit yourself, especially if you're struggling with your spending.

Remember, when you spend PHP 10,000 on your credit card, you aren't just spending PHP 10,000. You will also be paying for interest if you don't pay the balance in full at the end of the month. In the Philippines, the average credit card interest rates are at 24% per annum or a maximum of 2% per month. The longer you leave your balance unpaid, the more interest it will accrue.

You’ll want to go back to your budget and discover what your disposable income budget is like. Ideally, you want your credit limit to match what your disposable spending power is and not a peso more.

Be critical of yourself and your spending habits. Make an honest thoughtful observation about your spending habits. From there, you can take control of your credit limit by increasing or decreasing it.

Be a smart credit user, don’t go over the limit

Your credit card limit is a powerful number. Many people use it to flaunt their financial status but if they’re not careful about their spending habits, their credit limit can hurt them instead of work for them.

Assess yourself first before increasing your credit limit. If you don’t trust yourself to keep your spending in check, it’s best to leave your credit limit as is. While increasing your credit limit provides you with more borrowing power and has a positive impact on your credit score, it may have an opposite effect if you max it out often. When you get access to more credit, use it responsibly, and keep your credit utilization ratio in mind. Your budget and credit score will thank you for it.

Learn how to be more credit card savvy with Metrobank. Choose a Metrobank card that fits your lifestyle and needs -- be it for increased spending power or worldwide purchasing convenience. Discover the many services and features you can count on with your Metrobank credit card. We also help you maximize the benefits of owning a credit card with bite-sized tips on how to manage your credit limit, monitor your transactions, and other important information.