Most of us are already familiar with the advantages that a credit card provides. Besides the convenience they provide, which allows for online shopping and cashless payment, most credit cards also offer rewards when you pay through your credit card in the form of points, cashback or miles. These rewards can be substantial, especially if you use the cards for most of your spending.
When you pay using your credit card, you are actually using debt to purchase the products and services first. This is because credit cards operate on a deferred payment system. Here’s how it works: the bank that issued your credit card pays for your purchases first. Later, you receive a monthly statement showing the total amount spent, which you need to repay. If you pay the full bill on time, you won’t be charged any interest or finance fees.
For most credit card applicants, there would be a default credit limit that is set by the banks. According to the Monetary Authority of Singapore (MAS), the regulatory limit on unsecured credit is up to 4 months’ income for those whose annual income falls between $30,000 to $120,000. If your income is above $120,000 per annum, there is no regulatory limit on credit.
Most banks issuing credit cards typically set the default credit limit at four times your monthly income. For instance, if you earn $5,000 a month, the credit limit for your card would likely be $20,000. Banks have the incentive to offer as high a credit limit as the regulations would allow them as this would support their payment and lending business.
Cardholders can request a temporary increase in their credit limit for large expenses, such as paying for a wedding. This allows them to accommodate bigger purchases than their standard limit would permit.
However, there are also good reasons to consider lowering your credit card limit.
Most Cardholders Would Likely Have Multiple Credit Cards
It’s important to recognise that the credit limit offered by each credit card, typically up to four times your monthly salary, isn’t the total credit limit available to you each month. This is because you might have multiple credit cards, each potentially offering a limit of up to four times your salary.
Consider someone with a monthly salary of $5,000 who needs to spend over $20,000 in a single month for new furniture and a year-end holiday. Instead of requesting a temporary credit limit increase from their bank, it might be simpler to distribute the expenses across several credit cards owned by them or their spouse. Doing so would likely also allow him to better optimise the credit card perks that are offered by each card.
Essentially, having a large credit limit on a single card is almost always unnecessary. Even if you’re using one card for all family expenses, it’s unlikely and generally inadvisable to exceed one to two months of your monthly salary in spending.
Lowering Your Credit Limit Reduces Your Exposure To Scams & Fraudulent Transactions
While having a large credit limit isn’t really useful, it does increase the risk that we face if our credit card is used for scams or fraudulent transactions.
For example, if your credit card details (or even our credit card itself) get stolen by a scammer, they could use it to make fraudulent online transactions without our knowledge.
Another possibility is being the victim of a phishing scam. You, or your loved ones, may unwittingly, become the victim of a phishing scam. It could be an online purchase you tried to make with your credit card via a phishing website. Though the “purchase” you make might be small, the bigger implication is that your credit card details are stolen and subsequently used to make a much larger transaction.
Having a high credit limit on your card isn’t particularly beneficial, and it can increase the risk of substantial losses in case of fraud or scams.
For instance, if your credit card information, or the card itself, falls into the hands of a scammer, they could use it for unauthorised online transactions without your knowledge. Alternatively, you or a family member might fall prey to a phishing scam, such as making a seemingly small purchase on a fraudulent website. This not only results in a loss from that transaction but also risks your credit card details being stolen and used for larger fraudulent purchases.
Lowering your credit limit doesn’t decrease your chances of becoming a scam victim. You need to adopt good internet habits to protect yourself from scams. What it does, however, is that it reduces the amount that you may potentially lose if you become a victim of a credit card scam.
In particular, if you have multiple credit cards, some of which you are only occasionally using for niche spending type, having a large credit limit that is 4 times your monthly income is almost always going to be excessive. In such cases, it’s advisable to lower your credit limit to mitigate potential financial risks in the event of card misuse.
Read Also: Step-By-Step Guide To The ‘Lock Up Savings’ For In-Person Withdrawals At DBS, UOB, OCBC
The post Why Intentionally Lowering Your Credit Limit For Credit Cards Is A Good Idea appeared first on DollarsAndSense.sg.
