Credit Limit Increase and Balance Transfer: Just because you were pre-approved doesn’t…
Just because you were pre-approved doesn’t mean you should get it
Have you ever gotten one of those emails or mails from your financial institution or perhaps signed on to your online banking and seen one of those messages that you qualify for a credit limit increase or a promotional balance transfer offer?
That’s exactly what I’m talking about
As good as that sounds, it may be very tempting to call your bank to accept the offer but before you go ahead, you may want to think long and hard about your decision
And ask yourself honestly. Do I really need it? Will I be able to pay it back without stress?
When I got my first credit card, I had no proper understanding of how to manage one and paying it off became a challenge.
As a college student or a recent post-graduate, trying to establish a balance between school, work and life it could be really difficult. And struggling to pay off unnecessary debt, can make the transition a whole lot more frustrating.
Eventually, things will get better and you will earn more and life will be a lot smoother but now is the time to keep your debt as minimal as possible and your credit as high for the bigger things you want to achieve later on
And accepting one of these offers, may not be the right way to start
Credit limit increase:
A credit limit increase can be very tempting to accept especially when you don’t have a high spending limit.
If this is your first credit card or you applied as a college student or a newcomer, chances are you weren’t given a high credit limit and an offer to increase it sounds like a no brainer
you can take a credit limit increase offer as a good sign because the lender believes you can pay it off and so they are trusting you with more credit but the real question is do you trust yourself?
A credit limit increase can be good for your credit score because it can help with keeping your credit utilization low.
Credit utilization is the ratio of your outstanding balance to your credit limit. For example, if you have a credit limit of $500 and you use $100 then your credit utilization is 20%. If you maintain the same spending pattern and you get an increase to $1000, your credit utilization becomes 10%. A general rule of thumb is to always keep your utilization below 30%
While the benefits of an increase may sound appealing, a higher credit limit also increases your propensity to spend more. When you spend more as a student or post-grad, it could become difficult to keep up with paying the full balance due monthly and then you begin to pay interest on the revolving balance every month
When you actually need the credit, it could also become harder to qualify for it. Depending on what kind of loan you are looking to get, they take into consideration your total multiple liabilities.
For example, if you have a credit card with a limit of $5000 and another credit card with a limit of $1000, Your total multiple liabilities is $6000. Even though you haven’t maxed out your limit, a credit is still considered a liability and could impeded your chances of getting more.
If it is absolutely necessary and you know you can keep up with paying off the monthly balance that’s fine. If you still want the increase but you aren’t sure you can keep up with the payments, instead of accepting the entire increase, ask to increase it to an amount you know you can keep up with.
Let’s start with how balance transfer works before jumping into if it’s a good idea to use a pre-approved promotional balance transfer offer
Typically, there are two ways a balance transfer works especially in Canada
A balance transfer allows you to transfer the outstanding balance from a high interest rate credit card to a lower interest rate credit card. It is a good way to consolidate debt and save on the interest and fees from the higher interest rate card
Promotional balance transfer offers can give you as low as 0% interest rate on the transferred balance with a 1% transfer fee for a certain period
Another way you can apply a balance transfer offer is to do a funds transfer. This means that you can transfer money (cash advance) from your credit card to your chequing account at a 0% interest rate instead of the 22.99% (could differ depending on the institution) for a certain period of time
Is it a good idea? It depends
If you are looking to consolidate your debt or pay down debt faster, balance transfer offers can help you do that and also save you money in return. And if you are looking to do some renovations or make a big purchase, a funds transfer is also a good option. The transferred balance is not accruing interest so all you need to do is make sure to pay it off entirely by the promotional period end date
Before you make the decision to do either or, there are a few things you need to take into consideration to keep you in good standing and also to reap the benefits of the balance transfer offer
1) Do not miss a minimum payment in any month: when you miss a payment within any given month during the promotional period, you will lose the promotional interest rate and you will begin to pay the required interest rate that comes with the credit card
2) Do not make new transactions on your credit card. Promotional interest only applies to the transferred balance, any new transactions will incur standard interest rates.
When payments are applied, they will go towards paying off the balance transfer first, before the purchases you made.
Therefore, until balance transfer is paid in full, interest will continue to accrue on purchase transactions and that could get expensive. If you don’t plan on paying off the balance transfer sooner, then avoid making any new purchases after accepting a balance transfer offer
3)If possible, pay off outstanding balance before accepting a promotional balance transfer offer.
As earlier stated, promotional interest only applies to transferred balance, therefore before accepting any offers, make sure you pay off your outstanding balance first because, again, when payments are applied, they will go towards the balance transfer first.