If you were just approved for a high limit credit card, you may be feeling pretty good. After all, a high limit credit card provides you with a great deal of financial protection. It can also be great for your credit score. A huge part of your credit score is the ratio of your credit card balance to your credit limit. Therefore, a higher balance helps you in that area. However, high limit credit cards come with some risks as well. Here is a look at some of the potential dangers that come with having a high limit credit card.
1. The Risk to Overspend
Obviously, one of the largest risks of having a credit card with a high limit is the chance to accrue more debt. Credit cards require a lot of diligence from users. You should never spend money you don’t have. Credit cards are there to provide you with a boost if you need emergency help. However, you should always make sure you can repay your balance. If you can’t, you will start to run up a lot of debt. That can cause some major financial problems for you, starting with a damaged credit rating.
2. More Interest Payments
Unless you pay your credit card balance in full every month, you will be subject to interest payments. If you carry a large balance on your high limit credit card, the interest can be significant. If you qualify for a credit card with a high limit, you probably got a decent interest rate as well. However, you also run the risk of carrying a high balance. That means your interest payments could negate the favorable rate you were initially given.
3. Damaged Credit Score
As mentioned earlier, credit card utilization is a major factor in determining your credit score. If you have a high credit limit and carry no balance, then your credit score is likely to be strong. However, if you carry a significant balance, your credit could crumble. The higher the utilization on your credit card, the worse your credit score will be. If you start to accrue debt you can’t handle, your credit score will remain low. That will make it difficult to obtain any new credit.
4. Higher Minimums
Ideally, you will always pay well above the minimum payment each month. However, in some cases you may have no choice but to pay the minimum. With a high limit credit card, that minimum payment could be higher than you can handle. Failure to meet a minimum payment could result in you paying it off late. That will lead to negative credit reporting, late payment fees, and an increased interest rate.
5. Failure to Understand Limits
In some cases, banks may issue you a credit card with no preset spending limit. These are known as NPSL credit cards. You may think you can spend as much as you want without ever going over your limit or having to worry about utilization. This is not the case. First of all, banks will have a cap on the amount you can spend. Therefore, it is possible for you to reach that cap. That can pose a number of problems for you. Secondly, banks will report an amount to the credit bureau that will be used to calculate your credit card utilization. This could be your high balance or it could be a limit you don’t know about. Either way, that can lead to a high utilization percentage.
High limit credit cards offer people a lot of benefits, but they need to be handled with care. You should make sure you read through all of your documents and ask your bank about any limits. Also, make sure you are able to pay off your credit cards each month so that you don’t accrue a large amount of debt.
This guest post was contributed by Andy at FinanceChoices.co.uk, a website based in the UK where consumers can find a range of credit cards with balance transfer deals.
to me the biggest pitfall to a high limit of a c/card is the risk of overspending. When that happens uncontrolled, that’s when the remaining nightmares will rear its head! I learnt a painful lesson myself and it took many years to climb out of that rabbit hole…
I couldn’t agree more with this post. Indeed higher credit card limit equates to bigger spending. Of course, if you spend more, you will be paying higher minimum payment and higher interest. So, don’t be tempted!