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Credit Card Limit Increases Carry Risks and Rewards

Credit Card Basics, Credit Cards
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credit line increase

As your income and expenses grow, you may find that the spending limit on your credit card or cards just isn’t enough to meet your needs. One solution is to ask your card issuer for a credit limit increase. But like most credit card features, a limit boost comes with some downsides. Here’s how to sort out the pros and the cons.

Benefits

A larger credit line can grant you more flexibility with your finances, and it might just help your credit score, too.

More spending power:  Perhaps you’d like to pay most of your bills on one card, but your current limit can’t support it. Maybe you’re trying to make a large purchase but are being blocked by your spending ceiling. Extending your credit limit means more power to use your card to pay for goods and services and to reap rewards such as cash back.

Lower credit utilization ratio: More often than not, a higher credit limit means a lower credit utilization ratio, and that can improve your credit score. The credit-scoring firm Fair Isaac Corp., known as FICO, evaluates your overall credit utilization two ways:

  • Per-card utilization: (amount owed on an individual card) ÷ (credit line available on that card)
  • Aggregate utilization: (sum of owed amounts on cards) ÷ (sum of all credit lines)

FICO looks at both numbers as part of the “amounts owed” component of its scoring, which makes up 30% of your overall score. If you maintain the amount of credit in use and expand the amount of credit available with a line increase, your credit utilization will go down and your score will typically go up.

» MORE: When should I ask for a credit limit increase?

Drawbacks

More credit is not always better. Consider these potential disadvantages to asking for a credit line increase:

Hard inquiry on your credit report: Before credit card issuers can decide on a line of credit increase, they often “pull” and evaluate the applicant’s existing credit. Credit inquiries can either hurt your credit (hard pull) or leave it unaffected (soft pull). Hard pulls typically occur when someone applies for a loan, a credit card or a credit line increase. Too many of these inquiries strung together in a short period can cause a temporary credit score reduction.

If you suspect you’ve recently had a hard pull of your credit, you may want to wait before asking for a credit line increase. Credit issuers don’t always pull your credit when considering a line increase request, so call your issuer to find out whether it does.

It could lead to more debt: Getting approved for a larger credit line does mean more spending power, but it could also mean getting deeper into debt. If you have the ability to spend more, you just might spend more than you can afford to pay off, thus racking up interest charges. This is where self-control and organization are key.

Creating and adhering to a budget is a great way to control credit card spending while evaluating monthly expenditures overall. A wise rule of thumb is to never spend more than you can pay off that month. Not paying on time can lead to late fees and potentially ding your credit score in the process.

As with most financial decisions, if you’re thinking about asking for a credit line increase, it’s important to weigh the costs against the rewards. If have good credit and you’re a responsible spender, extending your credit limit shouldn’t be a problem and it might even be beneficial to your finances.

Kevin Cash is a staff writer covering credit cards and consumer credit for NerdWallet. Follow him on Google+.


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