Are you one of the few people that use credit cards responsibly and never get into trouble with them? Congratulations, you are part of a small yet slowly growing minority.
You’ve probably also got a low limit on your card which has served you well over the years but is starting to be a hindrance because of rapidly increasing costs of living. Your ability to pay off your card hasn’t been diminished, just the amount of things you can use it for and therefore the cards relative effectiveness is starting to be impinged.
You wonder: “Is it time to increase my credit card limit?”
At least that’s the question I read on the wall of Facebook Group – Queensland Business this morning from Professional Pet Sitter, Aunty Vanessa (O Briain), owner of Gold Coast Pets.
She asks: Would love your opinion: I’m thinking of increasing my credit card limit. This is a credit card I use for business expenses from my car (mechanic) to other purchases. It’s been $2K for YEARS now. I’ve never been late with payments (I’ve auto BPay payments every week that make just over the minimum payment) … as well as putting extra money on it every so often too
I’ve paid it off 100% a few times.
Do you think the bank will increase it?
The general consensus from the group of business owners is that getting an increase should be pretty easy. At least with the limited amount of information the group had been given.
But in the world of finance today, there is no such thing as an easy question so I thought I’d share some of my thoughts in case, like Vanessa, you too have been considering increasing your credit card limits.
The Points that immediately sprang to my mind:
- Does she really need to increase her credit card limit?
- Should the bank increase her limit?
- What limit should she have?
1- Do you really need to increase your limit?
Vanessa had shown great responsibility with her card and lot’s of people could learn from her example. Had something in her business changed that now demands she need more available credit? Or was it just a whim?
It turned out that Vanessa’s card no longer served her needs as much as it used to and the seasonal nature of her business meant that she also suffers from income volatility. Increased expenses and income smoothing are good reasons to increase your card so long as it’s used judiciously.
Have you considered using Visa Debit instead? Save some dollars in an appropriate account in the good times to use for future major expenses such as car breakdowns and large annual bills. I like this method because savings can also earn interest in online accounts until they’re needed.
One of the respondents advised that credit cards are a good way to track expenses but for me it doesn’t work as an ability to track me doesn’t stop me spending money I don’t need to.
2- Should the bank increase her limit?
Vanessa had been self employed for over a decade but if you’ve been working yourself for less than two years, you might struggle to get an approval depending on how well you went with other credit scoring measures.
Vanessa has been very good at paying off her debt each month but that’s not always a good thing in the eyes of a bank. She may still get rejected.
Banks absolutely hate clients, who pay off their credit card debts on time, on small limits, as there is no money to be made for them. You pay very little interest and no overdue fees. Good for you, crap for them.
Did you know that one of the largest sources of complaints to the financial ombudsman is from people who within a few weeks of coming out of bankruptcy start getting credit card offers from ALL the banks, who know they can start getting their hooks back into a credit addict. Scary but true.
3- What limit should you have?
If you decide to go ahead and apply for an increased limit, know in advance what limit you want. The girl on the counter is an employee of the bank and it’s her job to achieve a certain level of sales target each week. You become part of that target.
If you only want to increase it to $3,000 make sure the person you talk to understands that. I’ve seen bank staff explain to a customer the contract they’re signing but completely gloss over the fact that they now have a $30,000 limit even though they only asked for $5K.
Like I said above, you become part of their daily sales target and they’ll justify it by giving you some corny sales pitch such as “Just because you have it, doesn’t mean you have to use it” or they’ll say something like “You never know when an emergency might hit and it’s better to be prepared”
Credit cards, as with other forms of debt can be invaluable wealth management tools. They can also be extremely dangerous if not used properly. Know your weaknesses and strengths in this area and have a game plan that works for your household.