Go Ahead and Accept This Credit Limit Increase
The next time your credit card company offers an unconditional increase in your credit limit, say yes. Why? Because it is one of the fastest and easiest ways to improve your credit score. You just need to make sure that you are not actually using an increased credit limit just because you have one.
Increasing your credit limit can improve your credit score
The FICO credit rating model (one of the most commonly used models in the industry) bases 30 percent of your credit rating on so-called “ leverage ”. This term refers to the amount of credit that you are currently using as compared to the amount of credit currently available to you. As a general rule, you want to keep your use of credit no more than 30% of your total credit limit, as this will start to negatively affect your credit rating.
For example, if you have a credit card with a credit limit of $ 3,000 and an outstanding balance of $ 1,500, you are using 50 percent of the available credit. If your credit limit is increased to $ 6,000, your $ 1,500 balance will become 25% of the available credit, which will almost certainly increase your credit score. The advantage of a good credit rating is that you will not be rejected as many loans and you will also be eligible for higher interest rates. In addition, as CNBC loan officer Matt Schultz notes:
“If you’ve nearly depleted your credit cards, increasing your line of credit may give you a little financial respite in case of an emergency.”
However, be careful
It’s important to note that this only works if you are basically ignoring your new credit limit. If you are already struggling with cost overruns, you may need to reconsider your decision to raise. A credit upgrade is one thing; incurring debts that you cannot pay off is another.
In addition, as The Balance points out , you do not necessarily want to accept proposals for credit limits that contain the phrase “get approval” or “meet the requirements”, as this could mean that you are requesting additional credit from your lender. This can lead to a ” hard loss ” of your credit, which will temporarily lower your credit rating by about 5-10 points, at least for a few months . An unsolicited proposal for a credit limit increase from your lender should be a clear proposal that does not require approval – and if in any doubt, be sure to ask what you ask your lender.
Bottom line
Accepting an increase in your credit limit will likely improve your credit score. However, if the lender has not offered to increase it, you can also request it. In this case, you may temporarily degrade your score for a few months, but the effect will be minimal, as improved use of credit will have a greater impact on your score in the long run. Just remember to time your request so that you do not apply for a large loan for at least a few months after your request.
This story was originally published on January 10, 2020 with additional information on April 16, 2021.