A credit card doesn’t have to be the piece of plastic you hide in the back of your wallet for emergencies only. In fact, with the proliferation of cards that let you earn rewards from cash to airline miles, your credit card can be an amazing financial tool. But if you opened your account when you were fresh out of college or when your credit score wasn’t so great, you might not have a very high spending limit.
The good news is that you can ask for an increase in your credit limit. Before you do, though, learn how to increase your limit without lowering your credit score.
How Your Credit Limit Affects Your Overall Credit Score
Your credit limit alone doesn’t affect your score, but the way you use it can. Mike Sullivan, a personal finance consultant and previously the director of education at Take Charge America, a national nonprofit credit counseling and debt management agency, says, “Your credit limit represents the amount of available credit you have. By itself, it doesn’t have much impact, but the amount you owe represents your utilization, and that can matter a great deal.”
Your credit utilization is calculated by dividing the total amount of revolving credit you owe by the total amount of credit extended to you. For example, if you have a credit card with a limit of $1,000 and you carry a balance of $100, your credit utilization ratio is 10%. However, if you charge another $500, your utilization jumps to 60%.
Credit scores consider both the utilization rate on each credit card as well as your total credit utilization across all accounts.
Rod Griffin, director of public education for the credit bureau Experian, says, “A good rule of thumb is to always keep your utilization rate below 30%. However, the lower your utilization rate, the better. … While a high credit utilization rate can be a sign of financial distress, a low credit utilization rate shows that you’re using less of your available credit.”
Griffin says credit scoring models will interpret low utilization to mean you’re doing a good job of managing your credit and keeping spending in check. And considering that it makes up 30% of your overall FICO score, credit utilization is a factor to take seriously.
How to Increase Your Credit Limit and Improve Your Credit Score
Although people are often wary of ways they can accidentally hurt their credit scores, increasing your credit limit is actually an easy way to improve your score.
“Increasing your credit limit immediately decreases your utilization,” says Sullivan. For instance, consider the example from above. If you increased your credit card’s limit from $1,000 to $2,000 and left your $600 balance untouched, your utilization would drop from 60% to 30%. That could have a significant effect on your score.
Of course, this only works if you keep your balances low. Griffin says, “For some people, higher credit limits could represent the temptation to spend more.” If your spending increases along with your limit, you won’t reap the benefits of a higher credit limit. In fact, you could end up increasing your utilization ratio if you’re not careful.
“In general, the best way to improve your utilization ratio is to pay down your credit card balance and then keep it as low as possible,” says Griffin.
Although a credit limit increase is generally good for your credit, requesting one could temporarily ding your score. That’s because credit card issuers will sometimes perform a hard pull on your credit to verify you meet their standards for the higher limit.
“Card issuers each have their own criteria when evaluating a request for a higher credit limit,” says Griffin. “Some lenders may check your credit report before approving any increase, while others may not.”
However, according to Griffin, the impact is “minimal.” Hard credit pulls generally knock your score by five to 10 points and stay on your credit report for two years….Read more>>