Factors to Consider Before Upgrading Credit Card

Credit cards issuers usually offer a basic credit card to new credit customers and those who have an average credit profile. Such credit cards may not necessarily come with lucrative benefits and reward points. While these cards can be a great starting point, cardholders often think about upgrading as their income and credit score improves over time.  

Getting an upgraded credit card is a wise step for those who are very disciplined and responsible with repayments. Here are a few things you should keep in mind before going ahead with a credit card upgrade: 

Assess your spending habit 

Credit card benefits, cashbacks and reward points are designed for a particular set of audience that has similar spending patterns. For instance, fuel cards offer higher cashbacks on fuel spends and shopping cards offer higher benefits on groceries and other lifestyle spends. Similarly, travel cards allow you to save money on hotel stay, travel and dining. Therefore, it is important to assess your spending pattern before opting for an upgrade. Upgrade your credit card only if it gives you more benefits on specific transactions that you often make.  

Review reward points and other benefits 

A credit card upgrade allows you to avail of special offers and higher rewards on future transactions. Apart from the general benefits, high-end credit cards also provide access to several lifestyle benefits, such as free access to airport lounges, dining discounts, free golf course membership, etc. 

Additionally, a few card issuers allow you to repay dues through accumulated reward points or/and charge lower mark-up charges on foreign card transactions. Therefore, before upgrading, analyse the reward points programme and other benefits as per your current lifestyle. 

Conduct cost-benefit analysis 

A credit card upgrade may come with higher joining and annual/ renewal fees as well. Many credit card issuers waive off this fee if you meet the spending target set by them. Therefore, opt for a credit card upgrade only if the monetary equivalent of reward points and other card benefits exceeds joining/annual/renewal fees of the upgraded card. So, do a cost-benefit analysis before deciding.  

Opt for a higher credit limit 

Typically, credit card issuers increase the credit limit when you upgrade your credit card, which has many benefits. First, with an enhanced credit limit, you can do more or higher-limit card transactions, which can help in financial emergencies. Also, credit card issuers provide pre-approved loans against credit cards based on your credit limit. Therefore, a higher credit limit will allow you to qualify for a higher loan amount. These pre-approved loans are among quick disbursal loans, with most loans generally sanctioned within the same day of submitting the loan application. Therefore, this too can be beneficial in an exigency.  

A higher credit limit can help in improving your credit score. While calculating your credit score, credit bureaus consider your credit utilization ratio (CUR). CUR is a proportion of your credit limit that is currently being utilized. Ideally, 30 per cent or lower is considered good CUR, and credit bureaus give a higher score to consumers having CUR within 30 per cent. A higher credit limit can help reduce your CUR, which can improve your credit score.  

An increased credit limit also increases your capacity to purchase products or services on EMIs. Many card issuers offer no-cost EMI options to select users. In this scenario, the interest cost of such EMIs is often met by the manufacturers/ merchants and the card user has to only repay the buying cost in the form of EMIs. You can also avail of additional discounts on the zero-cost EMI option on select goods, which lowers your purchase cost.  

However, the EMI option will block your credit limit by the transaction amount. The card issuer releases this amount as you start paying the EMIs. The enhanced credit limit will allow you to make regular spending effortlessly even after making huge transactions through credit card EMIs. Hence, while opting for a credit card upgrade it is beneficial to ask your issuer for a higher credit limit.    

The author is Associate Director & Head of Credit Cards, Paisabazaar.com 

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.