Every credit card has a unique credit limit that’s set by the card issuer. This is an important component of your card and determines the maximum you can spend during a billing cycle. Credit limits vary from one cardholder to another depending on the cardholder’s credit score. The better your credit score, the higher the credit limit you’re likely to have. This is because a high score indicates that you’re financially responsible. This is reassuring for lenders who trust that you’ll also be responsible with the higher credit limit.

While the initial credit limit is determined by your credit score, you can request an increase when your credit profile improves. Making all payments on time will boost your credit score significantly over time. A higher score may qualify you for a higher credit limit. Most banks will inform you about the increased limit qualification and ask if you’re interested. If you don’t receive any notification, you can apply for an increase in your credit limit.

These are some of the major benefits of higher credit limits.

#1. Lower Your Credit Utilization Ratio & Boosts Your Credit Score

Credit utilization is one of the factors used to calculate credit score. It accounts for as much as 30% of your total score. The lower your credit utilization, the higher your credit score.

Credit utilization refers to the amount of credit you use compared to the amount available to you. Regularly using close to your credit limit could be an indication of financial stress. It suggests that your personal finances are tight and you need the credit to meet your monthly expenses. This makes you a risky borrower and will damage your credit score.

Let’s say your credit limit is $1,000 and your credit card bill averages about $800 every month. That means you’re using 80% of your available credit. This will pull your score down. Increasing your credit limit will lower that percentage and help your score.

If your spending remains the same but your credit limit is increased to $2,000, your credit utilization will drop to 40%. That’s a considerable drop and will have a major impact on your score. Ideally, you should try and keep your average credit utilization at 30% or below.

#2. It’s Easier To Get Low Cost Loans And Additional Credit

This ties in to the lower credit utilization ratio and higher credit score. With a higher score, you won’t have any problems getting approved for credit cards, loans, or mortgage. You’ll also benefit from the lower interest rates on any line of credit. Lenders typically quote higher rates for borrowers with bad credit. This is to adjust for the higher risk involved.

#3. Helps In An Emergency

An emergency can happen anytime more often than not you need money to resolve the crisis. A sudden illness can mean mounting medical bills. Car problems and urgent home repairs can be just as expensive. There’s only so much you can put away towards an emergency fund. Having a card with a higher credit limit can help pay for these unexpected and unavoidable expenses. It’s better and cheaper than taking a personal loan, which is the only other alternative.

The higher credit limit can come in really useful when you’re traveling too. It helps if you have to book a room for a few extra days or book a flight ticket to return home urgently. It’s so much safer than carrying wads of cash around when traveling.

#4. More Buying Power

Maybe you want to buy a home entertainment system or flight tickets for the whole family. Paying for these purchases upfront can deplete your bank balance. On the other hand, you can’t use a low credit limit card to pay for high-ticket items. Here’s where a higher limit credit card can make the difference. With a higher credit limit, you can make large purchases entirely on the card. You don’t have to worry about getting another card or using up your savings upfront.

#5. Increases Your Rewards

Credit card rewards are linked to the amount you spend. The more you spend, the more points you earn that can be redeemed for attractive rewards. With a higher credit limit, you can spend more, earn more points, and redeem better rewards including vacations, miles and cashback.

When using your card to get better rewards it’s important to keep a couple of things in mind. Never go on a shopping spree just to earn points and rewards. It’s never worth it. The rewards are only worth it if you use your credit card to buy essential items. Also, make sure credit card payments are made on time and you don’t carry a balance. Late payments will cost you in terms of penalties and interest on the outstanding. They will also hurt your credit score and make a bad problem worse.

#6. Helps Avoid Credit Score Dings

One of the most common ways of getting access to more credit is by getting an additional credit card. However, every credit card application triggers a hard inquiry, which will ding your score by a few points. When this happens, it takes a longer time to recover your credit score. Increasing the credit limit on your existing card may be a better option. This will give you the benefits of increased credit without impacting your credit score adversely.

Should You Increase Your Credit Limit?

There’s no doubt that a higher credit limit has some powerful benefits. It lets you access money more easily in an emergency and offers more flexibility when it comes to making larger purchases. The biggest benefit is the ability to improve your credit score.

However it does have a few downsides that you should be aware of. Knowing you have instant access to extra funds can tempt you to spend on frivolous purchases. This can have several adverse consequences. It will increase your credit utilization, which will impact your credit score. And if you can’t afford to pay the bill in full by the due date, you’ll end up paying late fees and additional interest. This will impact your score even more.

It’s worth increasing your credit limit only if you are sure that you will use it responsibly. If you’re likely to max your credit limit no matter how high it is, it’s best not do choose this option. In this case, the drawbacks will outweigh the benefits of the higher credit limit.