Increasing the credit limit on a credit card is merely an opportunity to spend beyond your means, right? Not necessarily. In fact, increasing the 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 credit score.
In fact, there are at least six reasons why it can be good to increase your credit limit.
Key Takeaways
- Increasing your credit limit can lower your credit utilization ratio, potentially boosting your credit score.
- A credit score is an important metric that lenders use to judge a borrower’s ability to repay.
- A higher credit limit can also be an efficient way to make large purchases and provide a source of emergency funds.
- However, if an increase in a credit limit encourages you to spend beyond your means, the mounting debt will likely outweigh any benefits.
1. Lowers Your Credit Utilization
The FICO credit-scoring model will ding your credit score if the amount of credit that you’re using is close to the total amount of credit available to you. That’s because lenders consider you to be at risk of taking on too much debt, making it more difficult for you to keep up with future payments. Even if these risks don’t actually apply to you, that’s how the scoring model works, and your credit score can suffer as your credit utilization ratio increases.
For example, if you have a $2,000 credit limit and you regularly end up with a monthly balance of around $1,800, you’re using 90% of your available credit. Raising your credit limit will reduce the percentage of funds being used, lower the credit utilization ratio, and should improve your credit score—as long as you charge roughly the same amount as before.
Credit experts generally recommend keeping your credit utilization ratio at 30% or below.
2. Cheaper and Easier to Get Loans and Additional Credit
If your credit score is higher, you will have a better chance in the future of getting approved for another credit card, a car loan, or a mortgage. You’ll also have a better chance of getting a lower interest rate since your credit score determines whether you’ll be offered the best available rate or a higher, risk-adjusted rate.
3. Helps in an Emergency
Having a credit limit well in excess of your usual spending amount gives you a resource if you have a genuine emergency that you can’t pay for with cash. Say you’re traveling overseas and need to change your plans and buy a new plane ticket to return home immediately. Or the bill for an unexpected car repair exceeds the money that you have available in your checking account.
4. Helps You Earn More Rewards
If you consistently pay off your credit card balance in full and on time, but you’re not putting all of your expenses on your credit card, it might be time to start. Having a higher credit limit can help you do that and increase the rewards that you earn, such as cash back, points, or travel miles. The conventional wisdom says that you shouldn’t charge everyday expenses like groceries and gas to your credit card, but that advice only applies if you’re carrying a balance—it’s designed to help you avoid making a bad problem worse.
On the other hand, if you never carry a credit card balance, then paying for recurring expenses on your credit cards won’t cost you anything and can help you earn more rewards. Those rewards can actually reduce your spending in other areas by helping you pay for vacations, gifts, clothes, and nights out.
5. Lets You Make Large Purchases Efficiently
You already know that using your credit card to pay for large purchases is convenient and can help you rack up rewards. What you might not know is that your credit card likely includes a number of consumer protections that can come to your rescue if there is a problem with your purchase. For example, Mastercard’s protections include extended warranties, price protection, and coverage for damaged or stolen items. American Express offers similar benefits.
Check your credit card agreement to see what protections and restrictions apply to your cards.
6. Helps You Avoid Credit Score Dings
One way to get access to more credit is to obtain 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 credit history, 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 of your accounts are factored into the length of your credit history. This metric affects around 15% of your score.
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How do you request a credit limit increase?
To request a credit limit increase, call your card issuer’s customer service number (generally on the back of your card) or apply online. You will usually need to supply information similar to when you applied originally, such as your current income.
Is it good to increase your credit score?
Unless you already have a perfect credit score, increasing your credit score is always a good thing. That’s because a higher credit score increases the trust signals you send to lenders that can translate to lower cost in the form of getting their best interest rates, promotional offers, and rewards features.
Can a credit card company lower your credit limit?
Yes, a credit card company has the discretion to lower your credit limit as well as to raise it. The company is most likely to lower your limit if you have failed to pay your bills on time.
How soon will a credit limit increase go into effect?
That depends on your credit card company. In some cases, it will happen immediately. In others, it may take a few days. Note that some credit card companies will raise (or lower) your credit limit automatically, without your requesting it. In that case, they will notify you about the new limit.
The Bottom Line
If you know that you’re likely to spend up to your credit limit no matter how high it is, then carrying the higher debt burden will probably outweigh any benefits from increasing your credit limit. Otherwise, consider requesting an increase. Before doing so, make sure that you have an established credit history in good standing.
