Credit Limit Increases: When is Enough, Enough?
Credit cards come in different classes (gold, platinum, etc.). Regardless of your card type, it’s always a good feeling to go where you want and whip out your card without having to front cash. It also makes you feel important, knowing you have all the money you need on a card, although your pockets are dry.
Imagine how awesome it would be to get your credit limit increased. Before you accept that credit card increase here are a few things, you should know because it may not be so fantastic after all.
What Are the Advantages of a Credit Limit Increase?
Credit Utilization Rate – One factor that impacts your credit score is your credit utilization ratio. Your credit utilization ratio is your maximum credit compared to what you use. The less credit you use, the better your utilization rate is to lenders. So, having higher credit limits can improve your credit utilization rate — when used correctly.
Spending Emergencies – The other thing is that with a credit line increase comes more power to spend. This can be great when you have a financial emergency and need access to money — quickly!
Reward Points – Many credit card companies offer you access to incentives and rewards. The more you spend, the more rewards you rack up. These rewards can be used toward travel, lodging, merchandise, events, etc. For the rewards to benefit you, you must make sure you’re using your card responsibly while taking advantage of the rewards and incentives.
What Is an Automatic Credit Limit Increase, and Should You Accept It?
Automatic credit increases are increases you can receive from the card issuer to your credit card limit without asking your permission. A credit card company can take it upon themselves to automatically increase your credit limit because:
- You make consistent on-time payments.
- You’ve been a cardholder for a long period.
- You’ve reported an increase in your income.
Should You Ever Decline a Credit Limit Increase?
While a credit limit increase can initially seem awesome, it may not always be. But why wouldn’t you want access to more credit, you might ask? I can think of a few reasons:
Causes you to lose sight of priorities – Increasing your credit limit may not be good if you’re trying to establish stable financial ground. That’s because it’s very tempting to have easy access to so much money that’s not yours.
Remember, your college years and all those credit card offers came through the mail? The offers were very tempting to someone who possibly did not have a steady or no income. It made it seem so easy to have money whenever needed. But let’s be real, during college days, it was all about having access to money whenever you wanted it. The same concept applies to someone just starting and trying to gain financial footing. The last thing you want is to be too deep in, over your head, and having easy access to so much capital can cause that.
It can hurt your credit utilization rate – With an increased line of credit comes more temptation to spend. This could even cause you to max your card. Doing this will only hurt your credit utilization rate, a primary factor in your credit score.
Negatively impact your credit score – It’s one thing to increase your credit limit to make your credit utilization rate look better. But increasing your credit limit to max it out is another thing. When you increase your credit utilization rate or the percentage of credit you have against what you’ve used, it will ultimately have a negative look on your credit report. Also, consider that if a credit card company makes a hard inquiry before increasing your credit limit, this could also negatively impact your credit score.
Although some credit card companies may automatically increase your limit without asking due to your payment history, you don’t have to accept it. If you know a credit limit increase is something you don’t want in the near future, just let the company know in advance. You can do this by putting it in writing so that it’s part of your file and flagged on your account.
You can also reject an automatic increase that you’ve already been given. While this could temporarily red flag your credit report as negative, it’ll be short-lived and won’t significantly impact your report in the long term.
When Should You Ask for a Credit Limit Increase?
You may sometimes be tempted to inquire about a credit card limit increase for yourself. It’s very easy to do. All you have to do is call the customer service number on the back of the card and ask for an increase in your credit. They’ll either say “yes” or “no.” But before you do that, you should know there is a right time and a wrong time to ask for a credit limit increase.
The Right Time To Ask for a Credit Limit Increase
When you have more money coming in – If you’ve received a raise on your job or have secured additional income to help cover increased credit card payments.
When you have a good credit score – A good score already looks good to lenders because you’re showing that you’re a responsible spender and can manage your money; you have a good credit history. The increased credit limit reinforces that to them.
When you have your priorities in order – If you’ve got this money management thing down and know how to prioritize your spending and use your card responsibly, you’re ready to increase your credit limit.
The Wrong Time To Ask for a Credit Limit Increase
When you’ve made multiple requests elsewhere – Applying for new lines of credit here and there or calling multiple credit card companies and asking for increased spending limits is a red flag for lenders. It triggers a cry of financial distress. When you apply for new lines of credit or ask for credit limit increases, they may do a hard pull of your credit, which appears on your credit report. This does not look good to creditors. Decide if you want a new line of credit or a credit limit increase, but don’t do both. Also, decide the best company to request the increase from.
When your income has decreased – If you’re strapped for cash, it may seem like an easy fix to increase your line of credit to help cover some of your expenses. But this will only make it harder to pay your credit bill on time, and it’s likely that with less income, it wouldn’t get approved anyway, causing another hard pull of your credit.
The Bottom Line
A credit limit increase may seem like a fantastic thing at first. But before accepting an automatic credit limit increase or asking for one, evaluate your financial situation to know if it’s a wise next step. If it is, great! If not, continue to budget, learn to manage your money properly, and try again when the timing is good.