Does Increasing Your Credit Limit Affect Your Credit Score?
What Happens If You Raise Your Credit Limit?
Many customers have as their aim to get a higher credit limit on one or more of their credit cards. A greater limit indicates that one has enough money to spend while making purchases, thereby enabling them the flexibility to spend as they like. Still, you may be curious about how a credit limit raise will influence your credit score even while you apply for one. Here's what you should know.
Credit Limit: What Is It?
Simply said, the credit limit is your allowable spending limit on your credit card account. Furthermore different from one card to another and from one customer to another are credit limitations. You therefore have a greater chance of obtaining the larger limit if you have a better credit score, more income, and less debt.
Among the components forming FICO and VantageScore credit ratings is the credit use ratio. This ratio gauges the overall availability of revolving credit against total balances. Some guidelines state that maintaining this ratio below 30% will help you not to lower your results.
Applying for a higher credit limit
In case you are approaching the limit of your credit card, this is where you apply for an increase in the limit. All but the lowest credit card issuers allow the cardholders to apply for a higher credit limit every 6-12 months if they have been paying their bills on time. When applying for credit limits that one did not have before, then a “hard” credit check is frequently conducted, but not necessarily always.
It is also important to review your credit card's contractual terms and the issuer’s website to gather more information on their policy and guidelines on how to go about requesting an increase. After that, you can request to increase your credit limit through customer service or by filing an online form.
The bank will assess your payment history, credit reports, and other details and approve or reject your request. It can never harm to politely inquire about having your limit increase – particularly if you pay your balance on time every month.
Immediate Effects on the Credit Rating
Here is how your scores can be affected in the short term when you apply for a higher credit limit.
Hard Inquiry: If the card issuer pulls your credit, they will do a hard pull. Hard inquiries are detrimental and result in a small, temporary decrease in your scores by less than 5 points. The effects are reduced between six months and one year after the event.
Lower Credit Utilization Ratio: If your credit limit has been approved for an increased amount – for instance, 10000 instead of 5000 – your credit utilization ratio will drop on its own. For instance, if your balance is 2000, then your ratio has reduced from 40:1 to 20:1 because of the new increased limit. This change usually leads to a small increase in scores.
Higher Available Credit: A new 10000 limit also increases your total available revolving credit which can have a positive impact on credit scores in the short run as well as in the long run.
Long-Term Impacts on Scores
Over time, here’s how an increased credit limit may impact your credit score.
- Ongoing Lower Credit Utilization Ratio: So long as you retain the balances or they only minimally increase, your credit utilization ratio will be improved. It is a good idea to keep the utilization under 30 percent every month to improve your scores.
- Potential Higher Balances: However, some consumers get to charge more when they are given a higher credit limit. Taking your balances to a level close to the new limit shall have adverse effects on scores in the long run. Do not fall into the trap of spending just because you have the potential to make more purchases.
- Potential Failure to Make Payments: One potential danger is that there may be a tendency to borrow more than one can repay. Late or missed payments are also very disastrous to credit scores. Ensure that any changes you make are within your financial capacity and you are capable of meeting the bill on time.
Considering Credit Limit Increase Request
Consider the following pros and cons before requesting a higher limit. It is generally perceived that more credit access is seen as a positive. Nonetheless, you have to be prepared for the fact that you are to take more potential debts in your hands.
Ultimately, get your credit limit raised only if.
- You have a demonstrated need for increased purchasing power without any increase in pay or ability to timely repay the loan.
- Make sure to maintain low balances and the credit utilization rate below 30% even though this increased the available credit.
- Are quite sure that you can keep away from the chances of incurring more debts and pay on time every month.
All in all, if you have not fulfilled all the above requirements, then attaining a high limit could prove as a disadvantage in the long run – specifically if you are unable to contain credit utilization. It can be beneficial for your credit scores in the short term because you will have a lower DSO to total sales ratio. However, there is a very high risk of damaging your scores if you are getting more balances and revolving debt every month.
Think twice before you go for more credit as it affects your financial health. An increased limit may be useful, but it also has its drawbacks if you consider customers’ conditions and their ability to handle the newly received privileges to buy goods. Be cautious when it comes to credit usage to make sure any credit line change – current or future – is beneficial for changing the score to a positive outcome.
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