Credit limit increases can be pretty confusing—and they can happen in more than one way. You may have outgrown your available credit and need to request some more. Or, if you’ve used your credit card responsibly, your credit card issuer might notify you that you’ve earned a credit limit increase.
But what are the implications of a credit limit increase? And how do you qualify for a credit limit increase in the first place? Whether you’re contemplating asking for an increase or just received one, here is some information to help you out.
Why Were You Offered the Increase?
If you have a credit card in good standing, there are typically two ways to obtain a credit limit increase. First, you can request the increase yourself. If you do so, you’ll probably need to provide information about your income, monthly mortgage or rent payments, and employment status. Your credit card company will weigh these and other factors in deciding whether to approve or decline your request.
The second option is when your credit card issuer grants you a credit line increase on its own. This decision depends on factors such as how long your account has been open and whether you’ve used your credit responsibly. Whatever the case, you deserve a pat on the back. Although it’s difficult to understand all your credit card issuer’s behind-the-scenes calculations, an automatic increase usually points to a healthy credit history on your end.
But why were you offered the credit limit increase? Here are a few reasons.
You used your existing line of credit responsibly
Sometimes a credit limit increase is your credit card issuer’s reward for using your credit card conservatively, staying away from debt when possible, and paying every credit card bill on time. In this case, your credit card issuer may automatically raise your credit limit or invite you to request one. The increase could just be a minor bump or could be as high as 30%.
The news of a credit line boost may come as a surprise, but it is no cause for alarm. In fact, it’s an indication that you’re managing your credit card well.
You’ve reported an increase in income
A higher credit limit may come against the backdrop of an increase in income. If you recently received a raise, you can update that information with your credit card issuer, which alone may make you eligible for a credit limit increase. Sometimes, your credit card issuer will even send you an alert requesting you to update your income level. In this case, your issuer offers a credit increase since a higher income means a greater ability to afford more expenses.
Your card issuer hopes to retain you
There’s a fierce battle for credit card market share. Card issuers often eye as many cardholders as possible because more cardholders translate to higher revenues. However simple it sounds, your card issuer may raise your credit limit to give you just one more reason to hang around and continue using their card. Issuers don’t want you to switch to another card if there’s a way to keep you on board.
Do Pre-Approved Offers Affect Your Credit Score?
Getting a pre-approved credit card limit increase is flattering, but what are its implications on your credit score? For starters, a pre-approval offer for a credit increase simply means that you’ve satisfied the lender’s initial screening process.
The process typically involves running a soft check into your credit history, evaluating your borrowing habits, validating that you make all payments on time, and probing your current credit balances. However, you must understand that a credit pre-approval is only an invitation and does not guarantee that you’ll receive the offered increase.
But here’s the good news; a pre-approval credit limit increase offer won’t impact your credit score because, with the process, the credit check usually results in a soft inquiry. You can only hurt your credit score if you follow through and apply for a credit limit increase yourself.
Advantages of Accepting the Increase
Some people will look at a credit limit increase as an opportunity to spend beyond their means. However, the truth is that increasing your credit limit may have several upsides if you manage your credit wisely. But how so? Here are the advantages of accepting a credit limit increase.
By now, you know that credit utilization is a substantial contributing factor in your overall credit score. In fact, it can impact up to 30% of your credit score. Your FICO credit score will take a hit if the amount of credit you’ve used is close to the total amount of credit available for you. That’s because lenders view you as at risk of taking too much debt, which can reduce your ability to make future payments on time. Even if this risk doesn’t apply to you, that’s how the FICO credit scoring model works, and your score will suffer as your credit utilization ratio increases.
Your credit utilization ratio is calculated by dividing the amount of revolving credit you owe by your total credit limit. Say you owe $2,000 and your credit limit is $4,000; you’re using 50% of your available credit. Now, let’s say you get a credit limit increase to $6,000—your credit utilization ratio falls to about 33%. Increasing your credit limit reduces how much of the available credit you’re using, which translates to a lower credit utilization ratio and consequently a better credit score.
A credit limit increase above your usual spending amounts leaves you with extra money to fall back on if you have a genuine emergency that you can’t pay for with your disposable cash, or your emergency fund. This is even more important if you’re close to maxing out your credit cards. You’ll have more financial breathing room if you need money quickly to deal with a change in plans, such as an unexpected flight cancellation or the need for urgent medical attention. Be sure to spend an amount you’re comfortable with paying off without overextending yourself.
Carrying a higher credit limit may be a good idea if you consistently pay off your credit card balances in full and on time, but you should pay for all your expenses with your credit card. Having a higher credit limit means that you have more room to spend on your expenses, which can help you increase the rewards you earn, whether those are travel miles, reward points, or cash back on purchases.
However, remember that you should not put everyday expenses like gas or groceries on your credit card if you’re carrying a balance.
If you don’t carry a credit card balance, paying for your recurring expenses with a credit card won’t cost you anything and will actually earn you more rewards. These rewards will help cut down your spending in other areas by helping you cover the costs of gifts, vacations, and hotel stays.
Disadvantages of Accepting the Increase
Sometimes, more credit isn’t better. Consider these potential disadvantages before accepting a credit limit increase.
Potential Hard Credit Inquiries
A credit limit increase is a double-edged sword—while it can boost your credit score by lowering your credit utilization ratio, it can also damage your credit score if there are what are known as hard inquiries into your credit history.
Before the issuer decides to increase your line of credit, it often pulls and analyzes your existing credit. A hard credit inquiry may occur when you apply for a credit card, a loan, or credit limit increase. Too many hard inquiries made within a very short period can cause a temporary credit score reduction. Be sure to ask your credit card issuer whether a hard inquiry will be needed before accepting a credit limit increase.
Although hard inquiries can have a serious short-term impact on your credit score, they typically won’t inflict long-term damage.
This one is pretty obvious. When your credit limit increases, your spending and the amount of credit card debt you carry may increase along with it. You may find yourself digging yourself deeper into debt and paying more in interest to your credit card issuer every month. Let’s get a little practical here: if you have a $4,000 limit and $1,000 in debt, you may be the kind of person who will spend more and increase your debt to $2,000 if your credit limit doubles to $8,000.
To avoid even more debt, practice responsible credit card spending and only make purchases that you’ll be able to pay off in full by the end of the billing period.
Higher Interest Rates and Annual Fees
Unless you can clear your entire balance every month, you’ll end up accruing more interest with each billing period. A credit limit increase means a greater chance that you won’t be able to pay your bill in full by the due date. In addition, carrying a higher balance on your credit card will lead to higher annual fees.
Conclusion and Recommendations
A higher credit line may be helpful when paying for larger purchases over time, dealing with unexpected emergencies, or covering more minor, day-to-day expenses. Exactly when to ask for a credit limit increase and the amount you request is up to you and depends on your unique circumstances.
Policies for a credit limit increase differ among credit card issuers. For instance, accounts that have only been open a few months are typically considered too new to qualify. If you’re eligible for a credit limit increase, your requests may be approved instantly. Otherwise, a request may take days to review or be declined altogether.
You stand a greater chance of being approved for a credit limit increase if your financial and personal information is up to date, you pay monthly statements on time, and you review your credit report frequently for errors.
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