Do you want to increase your credit limit and your credit score?
Conventional wisdom holds that the higher your credit limit, the more likely you’re going to get into debt, but let’s forget conventional wisdom for a moment and consider the positive side of things.
Increasing your credit limit not only gives you more buying power, it is a good way to increase your credit score. A lot depends on how you go about getting your credit limit increased and how you act once it’s done, but the point is, this can be a very good thing.
Some of the things you need to do include:
- Request a credit increase at the right time
- Do it for only one card
- Have a good credit history
- Take advantage balance transfers
If the lender is suitably impressed, they will increase the amount of money you’re allowed to spend with your credit cards.
Having more credit lowers your credit-utilization ratio, which determines 30% of your credit score. Ideally, your credit utilization ratio is 0% because you immediately pay your credit card bills every month, but anything under 30% is considered good.
The ratio is determined by dividing the amount of credit you used by your credit limit.
So, if you’ve spent $3,000 on a credit card with a $5,000 limit, your ratio is an unappealing 60% (3,000 ÷ 5,000 = .60).
However, if your credit limit increases to $10,000, your ratio plummets to the acceptable range of 30% and your credit score goes up. A higher credit limit will also make it easier to handle emergencies.
The key is to not behave like a credit card junkie just because you got a credit limit increase. If you do, your credit score will suffer, you’ll be deeper in a debt hole and you’ll regret ever considering increasing your credit card limit.
Here’s a more detailed game plan on how to go about things.
1. Pay your bills on time
This is the easiest way to increase your credit card limit. Every six months or so, credit card companies review your credit and decide if your limit should be higher based on how you’re handling your money. If you pay on time — and pay off the balance every month — they should offer to raise your credit limit.
2. Ask the card company to raise your credit limit
Sometimes credit card companies won’t offer a raise, so ask for one.
Credit experts suggest that you only ask for an increase when you’ve paid your bills promptly. They also recommend waiting at least six months after you received the credit card and asking for no more than a 10% to 25% increase. Asking for more than 25% might raise questions about your intentions.
You also should use your credit card frequently and pay off the balance when it’s due. This suggests you might have a legitimate need for a higher borrowing limit and that you’re capable of paying on time.
3. Apply for a new card with a higher limit
There is a good time and bad time to ask for a credit limit raise. Among the worst times:
- When you’ve experienced a loss in income. Whether you’ve lost your job or taken one that pays less, your ability to pay your debt has decreased. A harsh reality is that while you find a lower-paying job more rewarding, personal fulfillment doesn’t pay the bills.
- When you’ve made frequent requests. If you ask for an increase more than once every six months, lenders may take it as a sign of financial distress.
- When your credit score is shaky. Whether your low score is due to missed payments, having too much debt or too many inquiries, it’s a red flag to potential lenders.
- When you’re leaving the country. Overseas adventures can be wonderful, but travelers often leave their financial inhibitions behind. Increasing your credit limit increases the chance you’ll blow $29.95 on a breakfast buffet when there’s a $5 Egg McMuffin meal right across the street.
4. Balance transfer
Not only is this a shrewd financial move, it’s one that lenders are often willing and even eager to go along with.
When you transfer your card balance, you are moving the amount you owe on your old card to a new credit card that offers a lower interest rate, preferably a 0% interest rate. Essentially, you are refinancing your debt, and that could save you hundreds of dollars.
Say you owe $20,000 on a card that charges 15% interest and you plan to pay it off in one year. You would pay $1,660 interest. If you move that $20,000 balance to a card with 0% interest, you’d save that entire amount.
But beware! Calculate the transfer fee that comes with most cards. It’s typically about 3%, so it would be $600 in this hypothetical case. But you’d still come out $1,060 ahead, so that would be worth it. If the transfer fee is more than what you’d save in interest, the only explanation for doing it would be that you like to throw money away.
Remain keenly aware of the low introductory interest rates. Key word: Introductory.
That means they go up – often drastically – after six months, a year or sometimes 18 months. If you don’t plan on paying off the bulk of your debt within that period, you could end up with a huge bill and a higher interest rate than you started.
Credit card companies are amenable to balance transfers because it puts your debt on their books and they pocket transfer fees. And a lot of consumers don’t pay off their debt before the low introductory rate expires.
Don’t be one of them.
5. Roll two cards into one
It’s pretty simple. How much you make has a direct bearing on how much you can afford to buy.
In determining your creditworthiness, credit card companies estimate your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes to paying bills.
An increase in your income lowers your DTI, or it will until you add to your debt. But more money means you should be able to cover higher credit card expenses.
Just be prepared to provide proof of your new income, since lenders aren’t likely to take your word for it.
6. Increase your income
Do not use the spaghetti approach and throw a bunch of increase requests against the wall to see if any stick. It’s far better to hone in on one card, ideally the one with the best interest rate and lowest amount of debt.
The issuer will pull your credit report when you request a raise in credit, and merely making that inquiry can reduce your score by five points. So the more requests you make the more damage it will do to your credit score and the less likely it is you’ll get the increased credit limit you set out for.
7. Apply for a new card with a higher limit
One option is to start from scratch. Apply for a new credit card with a new company that has a higher credit limit. Note that if you close the old credit card it will affect the “length of credit” portion of your credit score (longer is better), which makes up 15% of a FICO score. That would cause your credit score to go down. You can always keep the card open and not use it. That would help protect your credit score.
8. Roll two cards into one
Some credit card companies will allow you to combine two of your credit cards into one as long as they issued both cards. You pick the one with the better benefits or longer credit history and close the other one. The catch is that both accounts have to be open for at least six months, and the card that is closed has to be paid off. Again, closing a credit card will affect your credit history. This technique isn’t for those who want to raise their credit limit as a way to raise their credit score.
9. Increase your income
The more money you make the more comfortable a credit card company will feel extending your credit limit. When you receive a raise, chances are good that – upon request – your credit card company would be willing to raise your limit. You can also pick up a side job as a way to raise your income and thus raise your credit limit.
Tips for Raising Your Credit Limit
Only ask for increases on one card at a time.
If you have five cards and are requesting higher limits on more than one of them, each request is considered a “hard inquiry” on your credit score, which automatically lowers it a bit. Multiple credit inquiries also suggest you have an urgent need to borrow a lot more money, something that makes lenders nervous. Allow about two months between each request to diminish the effects of a hard inquiry.
Pick your best card
Since you can only do one card at a time, start with the best one. That should be the credit card with the best benefits and the one you use most often.
When not to ask for a credit limit raise
If you recently suffered a loss of income, chances are not good for a credit raise. Also, card companies will be reluctant to increase your limit if your credit score is low, especially if that’s because of missed payments. You’ll want to raise your credit score before you ask for a credit increase.
How to Ask for a Credit Limit Raise
Before you call your card company to ask for an increase, consider what you’ll say. Desperation and a tendency to spend freely are not qualities banks favor. Don’t say you’re going through a rough patch and urgently need access to more money. And don’t say you need a higher limit because you max out your card every month.
But if you say your goal is to lower your credit-utilization ratio (a bankers’ term that suggests you know your stuff) and that you’re meticulous at paying what you owe every month, your case gets stronger.
Remember that a lender can set whatever limit it wants, and typically uses your credit history, credit score and your income to arrive at a number. The issuer can raise or lower your limit at any time, as there are no laws that stop it from making changes. But the card company makes money when you use the card, so it has reason to increase your limit if it is comfortable with the way you manage money.
One more thing: Having at least one card with a high limit can be good in emergencies.
If you have a big expense, say a car down payment, and want to use one card, it’s nice to have a high credit limit. For that reason, some people take out more than one credit card with the same provider, then request that the credit limits be merged and one of the cards be closed. Banks often approve these requests since they don’t increase their risk exposure.
Why Have a Higher Limit?
If you’re the sort of person who puts less than $1,000 a month on a credit card, you might wonder why anyone would want a borrowing limit of 10 times that much.
The reason might not be what you think. People confuse credit limits with routine spending maximums, but in practice they’re not the same. Just because you have the green light to rack up $10,000 on your credit card doesn’t mean you should. In fact, it’s not a good idea unless you plan on paying back the money quickly.
The greatest benefit for having a high credit limit on your cards is that it could help improve your credit score. There are many benefits to having a high credit score. The higher your score, the better your interest rate on mortgages, auto loans and even student loans.
To establish your credit score, the agencies consider your credit utilization ratio — the percentage of your credit limit that you’re using at any given time. The lower your credit utilization, the better. Experts suggest spending no more than 30% of your credit limit. In fact, the highest credit scores belong to those who don’t exceed 10% of their limit.
How Is Credit Limit Determined?
Each card in your wallet has a credit limit. The credit rating agencies add all the limits together, then compare them to what you owe to arrive at a ratio. For example, if you have two credit cards and one has a $7,000 limit and the other a $3,000 limit, your credit limit is $10,000.
If you spend a combined $4,000 with the two cards, you have used 40% of your available credit, so your utilization ratio is 40%.
The advantage to higher spending limits on your card is obvious: A higher credit limit means you can owe card companies and still maintain a low ratio. If, for example, you raised your credit limit on the two cards in the above example to $10,000 and $5,000, your credit limit would be $15,000. If you spent the same amount – $4,000 – your utilization ration would drop to 26.6%.
The lower utilization ratio should help raise your credit score.
Smith, J. (2018, March 26) 15 things credit card companies are hoping you’ll forget. Retrieved fromhttps://www.marketwatch.com/story/15-things-credit-card-companies-are-hoping-youll-forget-2018-03-26
Hayes, A. (2017, June 20). Juggling debt: How transferring a balance affects your credit score. Retrieved fromhttps://www.usatoday.com/story/money/personalfinance/2017/06/20/juggling-debt-how-transferring-balance-affects-your-credit
Gerstner, L. (2018, March 27). Family finances: Four ways to trim account fees and credit card interest. Retrieved from http://www.chicagotribune.com/business/sns-201803081609–tms–kplngmpctnkm-a20180327-20180327-story.html
Yovino, K. (2016, June 16) 6 Ways to Increase Your Credit Limit. Retrieved from: http://www.cheatsheet.com/money-career/need-some-flexibility-6-ways-to-increase-your-credit-limit.html/?a=viewall
Konsko, L. (2014, January 7) How Do I Get a Higher Limit on My Credit Card. Retrieved from: https://www.nerdwallet.com/blog/credit-cards/higher-credit-limit/
Bertagnoli, L. (2013, May 10) How to Ask for a Credit Limit Increase. Retrieved from: http://www.creditcards.com/credit-card-news/how-raise-credit_limit-1267.php
ValuePenguin, (2016, October 10) How to Negotiate a Higher Credit Limit. Retrieved from: http://www.csmonitor.com/Business/Saving-Money/2016/1019/How-to-negotiate-a-higher-credit-limit