Does Credit Line Increase Affect Credit Score?
Does the Opening of a Credit Line Help in Boosting Your Credit Score?
When you apply for a credit limit increase on one of your credit cards and the application is granted, you may be wondering how it affects your credit rating. Still, the higher limit makes more credit available and thus more possible debt, which you would assume could be viewed as riskier by the businesses determining your scores. But overall, having a high credit limit does not negatively affect your scores on its own. It can help in some cases, hence the reason why it has been widely used. Here is what you should know.
How Credit Reports are Determined?
It is important to understand what impacts credit scores before looking at how credit line increases influence the scores in particular. Your FICO and VantageScore credit scores, the two most commonly used types, both take into account five main factors.
- Stringency – The payment records of an individual. This category contributes to a large percentage of your scores.
- Utilization ratio – the amount of credit you are currently using about your credit limit. Mortgage-to-income ratios are usually advised to be below 30% by most financial gurus.
- The length of credit history is basically how long your credit accounts have been opened - This is good news, for a longer history helps your score.
- New credit – How many credit accounts you have recently opened? It is likely to reduce the score for a while if you create too many new accounts.
- Credit utilization – This is whether you have both a credit card and an installment loan. Variety helps your score.
The scoring models take into account all these categories and apply various formulas and algorithms to arrive at your scores. The calculations are geared towards the recent activity /trends rather than the older data.
Firstly, credit utilization is directly affected by credit limits.
If you are provided with a credit line increase, most of the scoring models do not consider the new higher limit when calculating your credit utilization ratio immediately. For instance, when you have a credit limit of $1000 and a balance of $500 at the time you are upgraded to a credit limit of $2000, your credit utilization ratio will again be depicted to be 50% despite the actual being 25%.
However, when the card’s issuer sends the new limit to the credit bureaus with the monthly balance report, your utilization is recalculated given the higher limit. This often occurs within one or two reporting periods. At that point, assuming your balance remains constant, your utilization percentage will go down because of the credit line increase.
Reduction of Credit Utilization Can Enhance Scores
Reducing credit utilization improves this component of credit scoring which is normally a part of thirty or more of the overall score. If your new limit is reported on your credit reports and your old 50 percent utilization reduces to 25 percent, this is what you would say. That is a great drop that can help increase your score, especially if before the factor was at 30 percent maximum, it comes out to 25 points or more.
The higher limit might also enable you to spend more but keep the utilization small or within an ideal range. For instance, if you usually try to maintain the overall utilization at a 20 percent level, then having a $2,000 credit limit means that the spending limit climbs to $400 from $200whicht was achievable when the credit limit was $1,000. Maintaining utilization under 30 percent during such a time is beneficial for your credit scores.
Potential Long-Term Benefits
Apart from the initial positive effect of lower credit utilization as soon as it is reported to the credit reporting bureaus, a higher credit limit has a few of the following positive impacts on the credit score after some time.
First, more available credit with the promise to responsibly utilize it is a sign of lower risk to potential creditors. Low balances as compared to these higher limits show good credit utilization skills. By increasing a credit line while maintaining a low balance on existing credit cards, it is possible to demonstrate positive tendencies in credit utilization in the future months and years.
Second, it means you can use other credit lines or loans more sparingly when an occasional big purchase comes up, which helps to keep your overall utilization lower across accounts. Thus, the reduced utilization of a higher proportion of total available credit remains indicative of lower risk.
Last but not least, as you continue to manage your credit responsibly, this will over time improve your length of credit history, which is part of your scores. Accurate long-term accounts with correct usage tend to bring about improvements in scores over the years.
When an Increase Might Lower Scores?
In most typical cases, a higher credit limit either improves the scores instantly because of low utilization or may not affect the scores in the short run but proves beneficial in the longer run from the scoring perspective. Nevertheless, there are two particular situations in which raising your limit can negatively affect your credit scores.
First, if you applied for a higher credit limit anticipating incurring more balance in the high credit limit soon, then the additional utilization is reported and reduces the scores. Some of the reasons for this are that lenders may consider this as a higher risk because they may think that you requested the higher available credit limit. After all,e you plan to use it shortly. And even if the utilization rate remains the same in terms of the percentage, the scoring models will still view higher total balances as more risky.
Second, a credit line increase request leads to a hard inquiry on your credit. The problem is that the frequency of hard inquiries within a short period is likely to harm you since it shows that you are looking for new credit. It is advisable to space out credit applications within not less than six months or a year.
Each of these two risks has a relatively short-term effect and, as a rule, scores revert to normal in a couple of months on condition that, with the new higher credit limit, credit utilization remains relatively low.
Assessing the Credit Line Increase Request
Since credit limit increase tends to bring usual benefits and poses little, if any, risks to your credit scores, the move is generally wise in most circumstances if the extra available credit is managed responsibly. However, before going for more credit always look at your expenditure habits and how you handle debts.
If you expect to be using credit even more shortly for a large purchase or change in your lifestyle, hold off on requesting that new card until you are back to a lower utilization rate after the event. If you have applied for other new credit recently, do not request a higher credit limit immediately as both will result in credit inquiries.
All in all, apply your best judgment about your finances depending on your circumstances. An increase in the credit line means more financial freedom and is sort of accompanied by a risk level, which if well managed for the long term, results in better scores. Check your credit score often and know how certain accounts and activities affect it before changing the habits significantly.
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