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.
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.
How to Raise Your Credit Limit
The easiest way to raise your credit limit is to pay your bills on time.
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.
Sometimes this doesn’t happen and you need to ask the card company to raise it.
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 should also 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.
Another suggestion: 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.
Know 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.