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Higher Credit Limit

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A higher credit limit, if not utilised, improves your credit score.
 
A higher credit limit can help you build a better credit histo ry. Take the case of Devendra Kumar. Kumar spends almost `40,000 on his credit card every month. Though he pays off the entire bill in time, his high credit utilisation of almost 80% (credit card limit is `50,000) is a red flag for lenders. It implies that he is at the risk of exhausting his card limit and could have trouble repaying his dues.

Credit bureaus take the credit utilisation ratio into account when calculating an individual's credit score, which is then used by banks to determine one's loan eligibility. "While computing the overall score, 20% weightage is given to credit utilisation and recent credit behaviour of the consumer," says Harshala Chandorkar, Chief Operating Officer, CIBIL. A high credit utilisation ratio means a lower score. Now, if Kumar get's his credit limit increased--subject to the credit card issuer's conditions--his credit utilisation ratio will come down. For instance, if the credit limit is raised to `1.5 lakh, his credit utilisation ratio for spending `40,000 a month will fall to 27%. A credit utilisation ratio of 20-30% is preferable. In case the ratio is higher, the applicant is seen as credit hungry. Banks may charge a higher interest on loans to individuals with a low credit score (high credit utilisation). They are seen as risky customers

Most banks revise users' credit card limit from time-to-time based on their repayment history, transactions, outstanding loans and rise in income. A cardholder can also request the issuing bank for a hike in credit limit. There is usually no additional cost involved, though an increase through a card upgrade may attract charges. Another way of increasing one's credit limit is by opting for multiple credit cards. However, holding mutliple cards is not the best way to secure a higher credit limit, especially, if you are a shopoholic--you may end up lowering your credit score. A single credit card with a higher limit is a the best solution. You will also save on the annual fee on multiple cards.

 

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1. BNP Paribas Long Term Equity Fund

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