Does Increasing Credit Limit Affect Credit Score?

This is one of the most common questions that many credit card holders ask, whether requesting for an increase in the credit card limit is the correct thing to do as it may lower the credit score. It is a good question since any change to the credit report like applying for new credit will affect the score. However, to ask for an increased credit limit on a specific credit card that you already own is a different issue altogether. Here is some important information about how it affects your credit.

What You Stand to Gain when You applied for a Higher Credit Limit?

Should you want to have your credit card company raise your credit card limit, the bank will do what is known as a soft credit check. Soft credit checks—also referred to as soft inquiries—are background checks unrelated to your score. This is so even if you could have previously gotten credit authorized using your present card. It's merely the bank's method of looking over your account to see if you qualify for a credit limit increase.

Conversely, a hard inquiry—usually carried out when one is asking for credit—involves the bank obtaining your whole credit report. Among the many uses are pre-approval for a new credit card, an auto loan, or a house loan. A few brief periods of several rigorous queries can somewhat reduce your credit ratings.

The most crucial thing to keep in mind is that the credit report will show only a strong pull resulting from your higher credit limit demand, which will influence the credit score.

What does a Higher Credit Limit do for Your Credit Score?

The actual act of requesting an increase does nothing for your credit scores, but what it does for your credit utilization ratio can help. This one shows how much of the credit limit you are currently employing about the overall credit limit you have. This contributes 30% to the calculation of FICO credit score and lower ratios are favored by the scores.

For instance, let your limit be $5,000 and your balance every month is $2,000. That gives you a credit utilization of 40% for the $2,000 out of $5,000 on the credit cards. If you are given the green light for a limit increase to $10,000, your new ratio for utilization is 20% with the $2,000 balance. This will in all probability raise your scores because you are utilizing a lesser percentage of your overall credit limit.

The ideal percentage that they advise not exceeding is 30%. Thus in an ideal world, to avoid any complications do not go to the extent of utilizing the full new limit. Make sure charges are kept at a minimum and pay your balance in full every month to avoid paying interest. By doing so, one will be able to manage credit responsibly and work towards improving their scores.

When an Increase May Lower Your Score Temporarily?

At times, credit limit increase can relatively hurt your scores for a while. This can occur when the hard inquiries from your initial credit card application pull your reports and your utilization ratio is still low before the higher limit has helped improve the ratio.

Here's a hypothetical example:

In this case, you apply for a credit card in January 2020. The hard inquiry knocks off a few points, but it is not a major concern.
In March 2022 you ask for an increase in your credit limit. This particular soft pull has no impact in the immediate time. However, the January 2020 hard inquiry will no longer be seen from early 2023 because credit bureaus avoid reporting on inquiries that are older than two years.
When that hard inquiry drops off, it will result in a minor boost to your score. But if the new higher limit has not impacted your utilization ratio as expected, then the increase may not be as significant as it would be if you never requested the new higher limit.

In essence, the minor impact of an old hard inquiry is completely erased before the positive outcome of a new credit limit can be felt. This means your scores may fluctuate a bit down for the initial period and then gradually up. The difference is normally in single digits and your scores will bounce back within a few months.

Expert Tips to Avoid Damaging Your Credit Scores

If you want to request a higher limit without any worries, keep these tips in mind.

Avoid applying for other new credit at the same time. New hard inquiries can stress your reports and offset any positive score improvements.
It is advised to request a raise after every 6-12 months of your service in the company. Waiting for longer intervals in between requests looks better while also allowing your utilization ratio to contribute positively towards your scores.
Request for raises in small proportional gains rather than many times your current threshold. Going from a $1,000 limit up to $15,000 may be detected as more reckless activity.
Maintain proper credit behavior, such as avoiding leaving balances outstanding on your cards. It means that the proper utilization of the even given limit will prove that the person is capable of handling more credit.

The Bottom Line

It also helps to keep the credit utilization ratio low and, thereby, fix a credit score after requesting a raise in the credit limits occasionally. So long as you are not applying for other new credit at that time having your limit increased is not going to have any negative impact on your scores at all. All that is required is to avoid spreading credit across various cards and to make payments frequently to get the most out of the score. This is because you might be given a heads-up by your utilization ratio and credit scores to request higher limits at particular times.

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