When you pay your credit card bill on time and keep your usage to a minimum (meaning your revolving debt is low), your credit card company will begin to view you as a trustworthy and responsible customer. It may even open the doors for you to increase your credit limit.
While a credit limit increase may sound good since it can add to your financial security, there are a few disadvantages that come with submitting a request to your lender for a larger line of credit. If you’ve been on the fence about increasing your credit limit, keep reading for a list of the pros and cons and insightful input from a finance expert and transactional attorney.
What are the advantages of increasing your credit limit?
A request for a credit limit increase brings with it many advantages. Some include:
- Access to more money. The first and most obvious advantage of increasing your credit limit is being able to access more money. This means if a costly emergency arises, you may be able to cover it with a higher credit limit. It also means you can make larger purchases when you don’t have the cash on hand.
- Lower your credit utilization rate. A larger spending limit can also lower your credit utilization, which is how much you’ve spent compared to your line of credit. Ideally, you want to keep your credit utilization at or below 30 percent since this helps keep your credit score in good standing.
So, let’s say your initial credit limit was $200 and you were utilizing 50 percent ($100) of it. But, after requesting a credit limit increase and watching your spending limit jump to $400, your utilization dropped from 50 percent to 25 percent, which puts you below the 30 percent mark.
- Improve credit worthiness. After speaking with Loretta Kilday, who is a DebtCC spokesperson, litigation and transactional attorney, and finance expert (with more than 36 years of experience), Market Realist learned that a higher credit limit can improve credit worthiness. Kilday says that it "demonstrates to lenders that a borrower is financially responsible and can handle larger amounts of credit, which can lead to better loan terms and interest rates in the future."
- Take advantage of rewards programs. If you are enrolled in your credit card's rewards program that offers incentives like cash back, Kilday says "increasing your credit limit can help your earn more rewards without having to change your spending habits."
Will increasing your credit limit have any negative effects?
If you’re leaning more toward requesting a credit limit increase rather than waiting for your lender to offer you one, you should be aware of the negative effects it can have. For example, if you don’t think you’ll be able to keep your utilization at or below 30 percent with a larger credit access line, it may not be the right choice to make.
Remember, credit cards shouldn’t be relied on as a source of income nor should you spend more than you can afford to pay back.
Some other potential drawbacks associated with requesting a credit limit increase include:
- Risk of missed payments. Kilday points out that with a higher credit limit comes higher minimum payments, "which can be difficult to manage if a borrower's financial situation changes unexpectedly."
- Increased debt. With a larger credit line, Kilday says you may be more tempted to overspend and this can lead to "increased debt and interest charges." So, if you're struggling to manage your existing debt, it might not be wise to increase your credit limit as it might only "make it harder for you to get out debt," says Kilday.
Another important point Kilday brought to our attention was income instability. "If a borrower's income is unstable or uncertain, increasing their credit limit can lead to financial strain and make it harder to keep up with payments."
Does your credit score go down when you request a credit limit increase?
If your lender needs to perform a hard credit pull to determine if you’re eligible for a higher credit limit, it could have a negative impact on your credit score. However, in many cases, increasing the credit line usually helps a credit score if you spend responsibly and keep your usage at the recommended limit.
When are lenders likely to approve a credit limit increase request?
According to Chase, one of the largest banking institutions in the U.S., your card issuer may approve your request for a higher limit if:
- You received a raise. Income is one of many factors that are used to determine your credit spending limit. And if your income is now higher than it was when you initially got approved, your lender may view this as a reason to give you a credit limit increase.
- You've proven to be a reliable customer. Many companies will increase customers’ credit limits if they make timely payments and have a low credit utilization ratio. If that’s you, a credit limit increase might be in your future.
- Your credit score falls within a healthy range. Some card issuers may still look at your credit score when determining whether you qualify for a larger line of credit.
Now, if you want to increase your chances of having your lender approve your credit limit increase request, Kilday recommends you do the following:
- Pay your bills on time
- Reduce your credit utilization
- Work on improving your credit
- Increase income
- Build a longer credit history
- Use the credit card responsibly
Before requesting a credit limit increase, it's always a good idea to weigh the pros and cons so that the decision you make doesn’t harm your credit or standing with your card issuer.