Downsides Of Increasing Your Credit Limit
Even if you think youll be able to manage borrowing more, increasing your credit limit might not be the best thing to do.
Having a higher credit limit might encourage you to spend more. This means you would end up facing larger repayments than you would have done.
If youre regularly using your overdraft, this can also affect your chances of qualifying for other kinds of credit, such as a mortgage.
However, having a high credit limit doesnt necessarily impact your chances of being approved for further credit.;
Why You Should Increase Your Credit Limit:
If you curious about how a higher credit limit can lead to lower credit utilization and corresponding credit score gains, an example might be helpful. Lets say you have a $500 credit limit. If you spend $200 in a month, you have 40% credit utilization. If your credit limit goes up to $800 and you still spend just $200, youd have 20% credit utilization. Anything under 30% is good for your credit score.
So, getting an increase can help you reduce your utilization percentage without having to cut back on your expenses. Plus, if you already have low utilization, a credit limit increase could allow you to spend more without hurting your score.
The Wrong Time To Ask For A Credit Limit Increase
When youve recently requested increases elsewhere or applied for new lines of credit.;A flurry of requests for new credit can be a sign of financial distress. When you apply for new credit, and sometimes when you apply for a credit limit increase, a hard inquiry appears on your credit report. New credit applications trigger a new credit penalty, which may hurt your credit, especially if the length of your credit history is short.
If you’re making less money, your spending power has decreased, so the issuer has no reason to extend more credit to you.
When youve taken on a lower-paying job. If youve recently taken on a lower-paying job,;even if it’s more fulfilling, this isnt the time to ask for an increase. Your spending power has decreased, so the issuer has no reason to extend more credit to you.
When your credit is iffy. If your credit score isnt good or excellent, its likely that you wont get approved for more credit because you havent shown good judgment with credit in the recent past. Build up your score before making a limit increase request.
When youre embarking on an overseas adventure. Travel feeds the soul, but it also makes you more susceptible to credit card fraud. Travel also frees our inhibitions, leading us to spend more than we normally would. By upping your limit, youll give yourself more leeway to run up an expensive credit card bill youll have to pay when you get back to reality. Wait to increase your limit until you get back.
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A Higher Credit Limit May Help Improve Your Credit Score
In the long term, a higher credit limit may actually help to improve your credit score. However, there is one important caveat: your debt-to-credit ratio.
If you get a higher credit limit and your balance stays the same, then your debt-to-credit ratio will be lower, which is likely to improve your credit score over time. Paying down your debt will reduce the debt to credit ratio further and your credit score should improve thereafter.
However, if you cannot control your spending, your debt-to-credit ratio will be higher and your credit score may drop as a result.
The Right Time To Ask For A Credit Limit Increase
Youll have a better chance if the account has been open at least six months to a year.
When your credit is good. A good credit score;signals to your credit card issuer that youre responsible with borrowed money. Therefore, youre more likely to make payments on time and understand how much you can afford to charge each month. You can;track your credit score for free via personal finance websites, including NerdWallet. Remember, good credit isnt the same thing as good financial health, but creditors assume that these qualities are linked. Aim to have both.
When you have a good track record. If youve made all of your payments on time and never maxed out your card, youre more likely to get approved for a limit increase. Youll also have a better chance if youve had your account with this particular creditor for at least six months to a year.
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What Is A Good Amount Of Available Credit
Theres no set amount of available credit thats good to have. In general, the more available credit you have, the better, as long as you use it responsibly.
During any application process, most lenders will look at your instead of your available credit. Your credit utilization is the ratio of your overall balance to your overall credit card limitit shows how much credit youre using. This gives them an accurate understanding of your specific credit situation.
For example, if you have a credit limit of $2,000 and a balance of $500, your credit utilization ratio would be 25% ; if you have two cards, each with a $1,500 limit and an overall balance of $200, your ratio would be nearly 7% .
Most financial experts recommend keeping your credit utilization ratio below 30%, and the lower, the better.
Call Your Credit Card Issuer
Theres typically a customer service phone number on the back of your credit card. Once you get on the phone with a representative, ask whether its possible to get a higher credit limit. The representative may ask you a few questions, such as why you want an increase or whether your income has recently increased. Its important to be honest about the reason behind your request.;
When you get on the phone with customer service, mention that youd like to increase your credit limit, not because youre in any sort of dire situation. You want to prove to them that youre going to be good for the money, Torabi says.;
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Hard Hits Versus Soft Hits
Hard hits are credit checks that appear in your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries.
Examples of hard hits include:
- an application for a credit card
- some rental applications
- some employment applications
Soft hits are credit checks that appear in your credit report but only you can see them. These credit checks don’t affect your credit score in any way.
Examples of soft hits include:
- requesting your own credit report
- businesses asking for your credit report to update their records about an existing account you have with them
Extra Protection Never Hurts Either
Boosting your credit card limit could help your credit score improve or prevent it from taking a hit. But that’s not the only reason to go after a higher spending limit. The more leeway you have to charge expenses, the more protection you have when a financial emergency strikes.
Ideally, you should have some money in the bank to tap when unplanned expenses pop up. But what if you don’t? Or, what if you have a healthy emergency fund, but you land in an extreme situation where it falls short? Suddenly, a higher credit card limit could come to your rescue.
Remember, while it’s true that a higher credit card limit could open the door to added spending, if you use your card responsibly, that extra wiggle room won’t hurt you. If anything, it could help you keep your credit score strong and buy you added protection in the event of a financial disaster. And for these reasons alone, it’s worth asking for.
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When Should You Increase Your Credit Limit
- You opened your credit card account at least 6-12 months ago.
- You have made consistent on-time payments for a year or more.
- Your income or your credit score has increased.
- You make a habit of paying more than the minimum payment on your accounts.
- The credit utilization rate on your account is low .
- Youve had new, negative changes in your credit report or credit score.
- You recently lost your job or experienced an income reduction.
- Your current credit limit is maxed out, or your balance is over the limit on your account.
- Your card issuer recently lowered your credit limit.
Helps You Avoid Credit Score Dings
One way to get access to more credit is to get another credit card, but increasing your limit on an existing card might be a better option. According to FICO, opening a new credit card can ding your score. When you open a new account, it shortens the length of your , and a long history often means an improved score. The age of your oldest account, the age of your newest account, and the average age of all your accounts are factored into the length of your credit history. This metric affects around 15% of your score.
Bart Colom Financial Advisor
Your credit score;should improve when your credit limit increases, as it lowers your debt ratio, as slong as you dont increase your outstanding balance. As long as you continue to pay-off your outstanding balances, your debt ratio should continue to decrease, improving your FICO score.
Requesting a can hurt your score, but only in the short term. If you ask for a higher credit limit, most issuers will do a hard pull, or hard inquiry, of your credit history. A hard inquiry will temporarily lower your credit score. Bank of America, Barclays, Chase, U.S. Bank and USAA will conduct a hard inquiry if you request a credit limit increase. American Express, Capital One and Wells Fargo will not. Citi will notify you when you call if they will generate a hard inquiry or a soft inquiry, which does not affect your score. Discover typically uses soft inquiries, but if you dont accept the credit limit offered and request a higher limit, it will then be a hard inquiry.read full answer
Hard inquiries will lower your by a few points, but can only affect your score for one year. After two years, hard inquires completely drop off of your credit report. The other thing you need to watch out for is overspending. Requesting a credit limit increase could really wind up hurting your credit score if you use the extra spending power to rack up debt you cant afford to repay.
How A Higher Credit Limit Can Help You
Increasing your credit limit can have some upsides if youre a responsible cardholder. A higher credit limit can boost your credit score as long as you maintain a low credit utilization ratio, and can make future borrowing less expensive. If your credit score decreases partly due to a higher credit limit, you may be eligible for lower interest rates in future.
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Do Restrict Applications For A Higher Credit Limit
When requesting a higher credit limit, a lender will search your credit history which can leave a mark onyour credit report. A high number of these searches may suggest that you are financially stretched andmay make lenders reluctant to increase your limit.
Making fewer applications overall, as well as limiting them to the card with the most attractive interestrates can help reduce the number of credit checks made in your name, which could limit the possiblenegative impact, and improve the chances of a successful application.
Prepping Your Credit Scores For A Mortgage Loan
While youre getting ready to apply for a loan and buy a house, remember these tips:
- Keep your credit card balances as low as possible all month, every month.You dont know when the banks will send information to the credit bureaus. If they report the day before you pay your bill, thats the balance they will show even if you pay it all off by the due date. When your credit score matters, try making more multiple payments per month.
- Dont make any big purchases, if you can help it. This is not the time to buy a car, new furniture or anything else that can deplete your cash reserves or add to your debt load. Dont think its OK to start spending when your loan is approved, either. Wait at least until the real estate deal closes before you make any big financial changes or expenditures.
- Watch your credit report closely.Fix any errors immediately.
- Boost your credit score.If your score isnt in the excellent range, take other steps to improve it as quickly as possible. For example, consider paying down credit card balances, if you can do so without depleting your available cash and emergency fund.
- Make sure you are ready to seek a mortgage.Be prepared to put off buying a house for a few months, if necessary, to get your credit score up to par first. Rushing into a home loan with so-so credit can be very expensive. Youll probably get a loan, but youll pay higher interest on the loan. Over the years, that additional interest expense can add up to a lot of money!
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Is There Any Reason Not To Take A Credit Limit Increase
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When you apply for a credit card, youre given a certain spending limit based on your income and creditworthiness. After six months to a year of timely payments and low revolving debt, you may be able to request an increase of your credit limit. But is this always a good idea? Heres why you may or may not want to ask for a higher limit.
Increasing Your Credit Limit Has Upsides But Only If You Don’t Overspend
InvestopediaForbes AdvisorThe Motley Fool, CredibleInsider
Increasing your is merely an opportunity to spend beyond your means, right? Not necessarily. In fact, increasing your credit limit can have a number of upsides if you manage your credit wisely. For example, it can help you repair your credit, make large purchases efficiently, or use credit to handle a sudden emergency. A higher credit limit can even boost your .
There are at least six key benefits of increasing your credit limit.
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How Can I Raise My Credit Score
You can improve your credit score by making consistent on-time payments, avoiding late or miss payments and avoiding new credit inquiries if your credit score is on the low-end. You are likely to see positive changes to your credit score over a period of time. Your credit score is a big deciding factor in being approved or denied for student loans, home rentals, credit cards, and mortgages, so it’s important to monitor it carefully for any activity that you could improve on. By improving or maintaining a good credit score, you could increase your chances of being approved for more lines of credits you may need in the future and possibly pay lower interest rates.
How Your Available Credit Impacts Your Credit Score
How much debt you have makes up 30% of your credit score. With that being said, the lower your credit utilization ratio, the higher your score is likely to be because youll have more available credit. According to an Experian report, here are the average credit utilization ratios for each FICO credit score range.
What Banks Report To Credit Agencies
In order to calculate your credit score, banks report information about your credit limit to credit agencies. Data reported include everything from new credit applications, whether you were approved or not, repayments and their timeliness, etc. They also report information related to your credit limit, including:
- how much credit you applied for when you submitted your application to open an account;
- how much credit the bank extended to you to use ;
- how much credit you are using.
These data are reported on a monthly schedule, giving the credit agency a snapshot in time of your finances.
What Else You Should Know Before Getting A Credit Limit Increase
Before you ask;
When to ask
- Got a pay increase
- Paid an existing debt in full
- Have a proven track record of paying your bills on-time for at least six months
- Continually pay more than the monthly minimum
- Have had a steady revenue stream for several months
- Have maintained a credit utilization of 30% or less
Sometimes, you dont have to ask at all
- Have a history of making late or less than minimal payments. Late or missed payments remain on your report for up to seven years
- Recently filed bankruptcy. Bankruptcies can remain on your account for up to 10 years
- Asked within the past few months
- Requested an increase on other cards within a couple of months. Space your requests out over time
What goes up must come down
- Your income has been reduced
- You dont use or rarely use your card
- Tough economic times are changing your credit habits
- You missed one or more payments
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