Match upgraded credit card benefits with spending pattern, beware of costs

Threshold limit for waiving annual fee should not exceed spending capacity

If you have been using a credit card for some time and have maintained a good repayment track record, your lender is likely to offer to upgrade it as a gesture of goodwill. As one’s needs evolve, upgrading one’s card can be useful. Nonetheless, the pros and cons should be weighed.

“Upgrading your credit card can yield better rewards, cashback, and more favourable terms such as lower interest rates or higher credit limits. However, it is essential to conduct a cost-benefit analysis,” says Adhil Shetty, chief executive officer (CEO), BankBazaar.com.

Upgrading your credit card is different from applying for a new one. The latter necessitates a fresh application, leading to a new line of credit, and a hard enquiry by the lender or the card issuer.

Here are a few points to consider when contemplating an upgrade:

Higher income level

As an individual’s income rises, he/she may develop needs that can only be fulfilled by an upgraded credit card. Says Raj Khosla, founder and managing director (MD), MyMoneyMantra.com: “If your recent income increase makes you eligible for premium cards with superior rewards and benefits, it could be an opportune time to upgrade.”

Enhanced credit limit

An upgrade often brings with it a higher credit limit. This can be advantageous, particularly if your current credit card usage leads to a high credit utilisation ratio, typically exceeding 50 per cent. Sustained high credit utilisation can impact your credit score negatively, as it may be perceived as credit-hungry behaviour. Says Khosla: “If your current credit limit no longer meets your needs, an upgrade would be beneficial.”

An upgrade doesn’t always guarantee an increased credit limit.  “Approval of a higher credit limit depends on various factors, including your monthly income, current credit card limits, existing debts, and the issuer’s internal policies,” says Shetty.

More benefits on offer

An upgrade may be ideal if the higher-tier card offers enhanced benefits that align with your new requirements. Says Shetty: “If your lifestyle or spending patterns have changed, consider acquiring a card that aligns with your current needs. For frequent travellers, a card with airport lounge access, travel rewards, or travel insurance could be a better fit.”

However, Arvind A Rao, founder, Arvind Rao and Associates, cautions against prioritising airport lounge access as the sole reason for upgrading. “The new card should be superior in at least three aspects: reward points, redemption facilities, and discount offers,” he says.

The upgraded card should offer more favourable terms. Says Khosla: “If the new card provides lower interest rates, reduced fees, and better forex mark-up rates, it might add value.”

Pay heed to threshold spend limit

The upgraded card may waive the annual fee if your annual spend exceeds a certain threshold. Suppose the threshold limit on your earlier card was Rs 4 lakh, which you were able to surpass comfortably. If the threshold limit on the new card is Rs 5 or 6 lakh, you may be able to cross it. But if it is Rs 7 or 8 lakh, you may face difficulty. “The higher threshold limit should not exceed your budget,” says Shetty.

The benefits should align with your lifestyle. If the airport lounge benefit on your card is for an individual while you usually travel with your family, it is of little use. The lounges you are allowed to access should be in the airports you tend to visit frequently. Similarly, free movie tickets may be of little use to those who primarily watch movies on over the top (OTT) platforms.       

Beware of costs

Ensure that you are aware of all the charges associated with the new card. Credit card charges include joining fees, annual fees, interest, ATM withdrawal fees, late payment fees, foreign transaction fees, and balance transfer fees. “If you tend to carry over dues, a card with a lower interest rate might be a better choice,” says Shetty.

Before proceeding, enquire about the issuer’s policy concerning benefits from the previous card, such as accumulated reward points. Some issuers don’t allow redemption of reward points from the previous card once you decide to upgrade.