Does A Credit Line Increase Affect Credit Score?

Most credit card users are concerned about whether applying for an increase in credit limit on one of the credit cards affects their credit score. Credit scores are arrived at from the information in Your credit report, that is by use of a mathematical formula from the Fair Isaac Corporation (FICO). They range from 300-850 with the highest credit rating being 850. That being said, while credit line increases are disclosed to the credit bureaus, the effect is not very significant as long as one’s utilization rate is reduced. Below is a closer look at the impact that credit line increases can have on your credit scores.

What does it mean to receive a credit line increase?

Credit lineup means raising the credit limit on credit card/revolving credit and the available amount to borrow on the card. Credit card firms usually conduct a check of your account from time to time in a bid to see whether you are eligible for a higher credit card limit. They may hike your limit without you prompting them to do so. But many card issuers also give the chance of requesting a higher limit at any time after being a holder of the card for some time, usually at least six months. If you send a request for a higher limit and the card issuer agrees, the new credit limit should be reflected on your statement the next month or in your online statement.

Here are some reasons why you may need to ask for an increase in your credit limit:

There are a few key reasons why consumers request higher credit card limits.

• To reduce the credit utilization ratio. Credit utilization rate, which is the percentage of credit card balances about total credit limits, improves a credit score when it is low. This is because higher use means higher credit risk, and this is why the utilization of credit cards is closely tied to credit scores.
• To make provision for a bigger purchase. You might be faced with a large expense and wish for the option to charge more on your credit card.
• To get cash. Some credit cards allow you to use your card for cash advances. The higher limit means the availability of more cash.
• To pay off other card balances. Sometimes, the other balances can be paid using the card with a higher limit thus enabling one to make small monthly payments.

Does Credit Limit Increase Affect Your Credit Score?

In most situations, the approval of a higher credit limit does not negatively affect credit score or has a slightly positive effect if the credit card holder does not raise his/her credit limit. Here are some key ways a higher credit limit changes the information used to calculate your score.

• These improvements will reflect on your credit report whenever the card issuer reports the update to the credit bureaus (Equifax, Experian, and TransUnion). This usually takes place within the first one to two credit card billing cycles.
• Simply, a higher credit limit as a standalone implies a lower credit risk because the credit limit available is higher. This influences utilization rates.
• If your card balances stay the same or increase more slowly than your new limit, your utilization ratio decreases and can help raise your score. Lower usage indicates lower credit risk.
• A credit limit increase can reduce the proportion of installment loans in your credit mix because it boosts your revolving (credit card) limit. However, the directional impact may not be significant.
• Even if you continue to pay your statement balance in full each month after your credit limit increase does not have a direct adverse effect on your payment history status, which is often the most critical element in your credit scores.

While usually positive or neutral, a higher credit limit also brings risks.

• It means that you are extending more credit lines to be utilized for things that may lead to a credit card balance. Having higher balances results in higher use ratios and can even reduce your credit score.
• If you don’t have a balance, your other family members who also utilize the card may spend more, thus affecting utilization and balances.

Things to Consider About Credit Limit Increase

If you receive or request a higher credit card limit, here are some tips.

• It is equally important not to buy more goods or services than you can afford because you now have a higher credit limit. It is also important not to charge more in a month than what one is willing and able to repay in full.
• One helpful tip is to make automatic payments for at least the minimum amount due each month to avoid late payments. This explains why payment history is often the major determinant of credit scores.
• It is advisable to scrutinize account statements each month so that other parties do not try to misuse your new, increased limit. Report any suspicious activity.
• It is advisable to utilize the newly acquired credit limit and transfer to other existing cards to maintain the diversity of the credit type.

The Takeaway

Credit scoring models may differ on the specifics but in most cases, a higher credit limit if handled responsibly is likely to result in a higher credit score or not hurt the score at all. The primary hazard lies in the inclination to utilize more credit as more credit is available. If you continue to maintain good financial practices, you should be able to enjoy the freedom that comes with a higher limit without negatively impacting your credit rating gains.

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