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 percent. However, if you charge another $500, your utilization jumps to 60 percent.
Credit scores consider both the utilization rate on each individual 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 percent. 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 credit utilization makes up about 30 percent of your overall FICO score, it’s definitely a factor to take seriously.
[Read: The Best Rewards Credit Cards of 2018.]
How Increasing Your Limit Impacts Your 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 immediately drop from 60 percent to 30 percent. That could have a significant effect on your score.
Of course, this only works if you keep your balances low. “For some people, higher credit limits could represent the temptation to spend more,” says Griffin. 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: The Best No-Annual-Fee Credit Cards of 2018.]
How to Ask for a Higher Credit Limit
If you’re ready for a credit limit increase, you might be surprised to find that your card issuer already granted you one. It’s not unusual for issuers to increase credit limits periodically as a reward for spending responsibly and paying your bill on time. Griffin says, however, that most major card issuers will not automatically raise your credit limit until you have at least six to 12 months of on-time payments and haven’t exceeded your credit limit.
If you haven’t received an automatic increase, usually all you have to do is ask. “Creditors usually don’t mind increasing credit lines,” says Sullivan. “In fact, they welcome it if they believe you will use it and pay.”
Many card issuers allow you to make the request online. Simply log into your account, update your income information and get an answer on the spot. In other cases, you will have to call the number on the back of your card and put your request through to a customer service representative.
Sullivan says that your issuer might be concerned if you have been making only the minimum payments or your balance has been steadily increasing month over month, which could be interpreted as signs you’re experiencing financial distress. If this is the case, consider waiting to request a credit limit increase until you’ve paid your balance down or received a raise.
And if you’re denied an increase, consider opening a new card instead. “Different lenders have different policies. One may be trying to limit credit while another wants to expand it,” says Sullivan.
[Read: The Best Starter Cards for Building Your Credit.]
Pitfalls to Avoid
In theory, increasing your credit limit should have an overall positive impact on your credit score. But the health of your credit depends on the way you manage your account. Be sure not to undo the progress you’ve made by making mistakes with your credit.
“The worst thing you can do to your credit score is miss a payment,” says Sullivan. At 35 percent of your FICO score, payment history is the most important credit score factor. Missing just one payment on a bill can drop your score significantly.
“The second-worst thing is breaking your routine,” adds Sullivan. He recommends slowing down and making deliberate decisions when it comes to changes to your financial situation. Too many changes at once, such as several requests for credit over a short period, could spell trouble for your score. Only apply for new credit when you truly need it.
And when it comes to increasing your credit limit, really consider your total financial picture first. “For example, if you know you’re a big spender, it may not be a good idea to request an increase because of the potential to stack on more debt and damage your credit scores,” says Griffin. On the other hand, if you have a good handle on your finances and are able to keep balances low, increasing your credit limit could be the key to opening up your financial opportunities.
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How to Increase Your Credit Limit (Without Harming Your Score) originally appeared on usnews.com
