When you apply for a credit card, you’re given a certain spending limit based on your income and creditworthiness. After six months to a year of timely payments and low revolving debt, you may be able to request an increase of your credit limit. But is this always a good idea? Here’s why you may or may not want to ask for a higher limit.
Why would you want a credit limit increase?
There are three major reasons why you may want to increase your credit limit:
You want to obtain more credit for making purchases. If your limit is too low to cover a large planned expense, you may want to increase it to take advantage of credit card rewards earned on that purchase. Ideally, you’ll have the money in the bank to pay this off before accruing interest. Or perhaps you lost your job and need a buffer to pay your bills. I’d recommend using 0% introductory APR credit cards instead of increasing your existing card’s limit. Here’s a list of our favorite 0% offers.
You want to obtain more credit in case of emergency. While you can’t use your credit card for every rainy day, it can come in handy for many emergencies. A credit card can pay for car repairs, necessary items that need to be replaced or last-minute plane tickets home. The higher your credit limit, the more you have available for any emergencies that may arise.
You want to lower your credit utilization. Your credit score is made up of five factors: payment history (35%), amounts owed (30%), length of credit history (15%), types of credit in use (10%) and new credit (10%). The second factor, amounts owed, is made up mostly of something called “credit utilization.” Credit utilization is your balance in comparison to your limit. So if you have a credit limit of $10,000, and a balance of $3,500, your credit utilization is 35%. There are two ways to lower this ratio — paying down your balance or increasing your limit. If you were to increase your credit limit to $12,500, and still had a balance of $3,500, your utilization would drop to 28%.
For more information on how to request a credit limit increase, check out this NerdWallet article.
Why wouldn’t you want a credit limit increase?
There are also a few reasons why you might not want to get a limit increase:
You don’t trust yourself to keep your spending in check. In this case, it may be best to leave your limit as is. If it’s already a bit higher than you feel comfortable with, you can call your issuer and request a limit decrease. However, keep in mind that if you have debt this will raise your credit utilization.
You don’t want to max out your credit limit with a particular issuer. Some issuers may put limits on how much credit you can get for all of their cards combined. If you hit a certain limit, you may be unable to get other cards with that issuer. So if you’re close to hitting the limit and want a new card, you might want to stick with your current limit or decrease it.
You don’t want a hard inquiry on your credit report. If you request a credit limit increase instead of it being offered to you, it may mean a hard inquiry on your credit report. A hard inquiry is an authorized credit pull from a lender or service provider. This will affect your credit score for a period of one year, and will remain on your credit report for two years. If you’re concerned about the state of your credit score and can’t afford to lose a few points, it may be wise to pass on asking for an increase.
Credit limit increases can improve your credit score and give you access to more funds in case of emergency. However, they can also provide you with more money than you can pay back without accruing interest or add a hard inquiry to your credit report. The decision to request or accept an increase will depend on your credit situation and spending habits.