A credit line, also referred to as a credit limit, is the maximum amount that you can spend with your credit card before repaying at least part of the balance. Depending upon a user’s credit rating and particular credit card, the credit limit might range from hundreds to tens of thousands of dollars.
Credit limits don’t just allow you to spend more, but are also a valuable tool for improving your credit score.
Why Credit Limit Is Important
To determine your creditworthiness, lenders will check your credit score and report from the three credit bureaus, which include:
A credit limit can have a crucial impact on your credit score. Your credit score reflects your ability to pay off your bills and loans on time.
After that, the most critical aspect is the credit utilization ratio. Your credit utilization ratio is simply the percentage of your credit limit you have used. Low credit utilization has a positive impact on your credit score.
Here is an example to help you understand how the credit utilization ratio is calculated:
Bob has a credit card with a $10,000 credit line. His balance is $5,000. Hence, his credit utilization ratio stands at 50% (5,000 / 10,000 = .50).
Tom carries two credit cards. Each card has a $10,000 credit limit and a $2,500 balance. The total limit is, therefore, $20,000. The total balance is $5,000.
So even though Tom’s total balance is $5,000, his credit utilization ratio is just 25%.
How can Bob bring down his credit utilization ratio? By applying for new credit cards or requesting a higher credit limit.
Lower Credit Utilization
One of the most significant benefits of a high credit limit is that for the same spending, your credit utilization ratio is reduced. This is shown in the calculations above. Therefore, with a higher credit limit, you can improve your credit score for the same spending.
Factors to Consider Before Requesting a Credit Limit Increase
Before you apply for a higher credit limit, you must note a few critical issues. Credit card debt is bad debt. If you feel you may not be responsible enough with the new limit, then it is best to avoid it.
One of the most crucial reasons for increasing your credit limit is to improve your credit rating. But, this also opens the door to more substantial borrowing, which is counterproductive.
If you are susceptible to overspending, then it is better to forego a bigger credit limit than face the risk of significant liabilities.
You may also apply for a cash back card. A second card might be a better choice if you want to enhance your credit usage ratio.
You can maximize your rewards through a mix of some of the very best credit cards. Also, these cards offer reasonable cash back rates, sign up bonuses, introductory 0% APRs, and other vital benefits.
You may also face limits on credit. Each credit card company will offer you a certain level of credit based on all of your accounts.
What this indicates is that if you increase the credit line for one account, then you may not have the ability to open new cards, or you might not have the ability to extend the credit line on other cards. Therefore, it makes more sense to shift your credit limit from one account to another.
After considering the factors above, determine whether or not you want to increase your credit limit. If you go for it, you need to know how it is done.
How to Increase Credit Limit
There are basically two ways for you to increase your credit limit:
1. Watch and Wait
The first method is pretty passive. You must wait until your credit card issuer automatically increases your limit. You need not apply or contact your credit card issuer.
While it may seem there is no work involved on your part, the reality is, there is. You must use your card responsibly and pay off your balance on time.
This must be done over a relatively long time. Ultimately, the credit card issuer will notice your good record and reward you with a higher credit limit.
If you are a responsible customer, your credit card company may frequently reward you with higher credit limits after 12 months, or even less.
To increase your chances of gaining higher limits this way, you can take these steps:
- Be frugal with your card and pay on time. Maintain a clean record. Your payments should never be late, nor should they be returned.
- Use your credit card frequently. Every time you swipe your card, a small amount goes as fees to your bank. Infrequent use of credit card will limit your chances of being offered a higher limit.
Automatic limit increases made this way don’t require a hard credit inquiry.
2. Make a Request
If you don’t want to wait too long, or want a bigger limit, make a request to your credit card provider. Contact your credit card issuer according to the procedure outlined on their website.
Each issuer has its own method for the application. The easiest way involves making a call to customer service representatives who can guide you throughout the process.
But remember that since requesting a higher limit is similar to a new credit card application, your credit card issuer may carry out a hard credit inquiry. This might appear to be detrimental to your score. But you must weigh the pros and cons of this request to determine if it is worth it.
If you increase your credit limit but keep your spending constant, your credit utilization ratio will fall. Your credit score will improve.
If you intend to use your card this way, then this will outweigh the slight adverse effects of the hard credit inquiry. So a higher credit limit will improve your score eventually, despite the slight initial decrease.
The impact of hard credit checks on your FICO scores are limited to just one year. Hard credit checks will also disappear from your credit report after passing two years. Therefore, the effect is temporary.
After you submit your request for increasing your credit limit, your lender will carry out an inquiry to assess your risk level. The lender might request proof of income, your monthly housing payment, and more. Based on this, the lender may reach a decision and take one of these steps:
- Grant your request
- Counteroffer with a smaller credit limit extension
- Deny your request
If your application is denied, you must wait for some time before applying again. You should try to improve your credit rating, make timely payments, and avoid returned payments. Ask the credit card issuer the reasons for the denial of your request. Once you know the reasons, you can act accordingly to improve your chances next time.
If low credit usage is your motivation for requesting a higher credit line, seek an alternative option (if your request has actually been rejected). You can attempt to apply for a brand-new credit card from another company. Different credit cards have their own credit limits, depending on issuer policy and the target market segment.
Here is an even better tip if you have a good credit score:
You can request a new credit from your existing credit card issuer. Ideally, select a card that complements your current card and maximizes its rewards.
If your request is approved, your credit limit will be automatically increased. You can then request your credit card issuer to transfer part of the new credit line towards the card whose credit limit you were seeking to increase. This way, you can obtain a limit higher than what you were previously aiming for.
Most credit card issuers allow customers to make an online request for credit limit increase. This should be your first option since it is quick and convenient.
The basic procedure is mostly the same for most accounts. First, log in to your account. There will be a section or link which says ‘request credit limit increase’ or something similar. Once you click it, you will then be taken to a page which will ask you to fill out an online form. Enter all your details correctly.
Depending upon the size of your requested increase and the issuer, you might even receive a quick answer. But if you have asked for a large increase, then your request could take several days to be processed.
If you don’t see an option for online request, or if you cannot make one, you may contact customer service to help you.
If you contact customer service, then a representative may give a quick approval (if your request is small). You may not even have to undergo a hard credit check. However, for larger applications, you must be patient as you might face a hard credit inquiry.
While talking to the representative, let them know the reasons you deserve a higher limit.
Remember, with a more considerable extension, there is a higher likelihood of being denied. So you must take stock of your situation and consider your credit history and score.
When Should You Ask for a Credit Limit Increase?
You need to make a request at the best time if you are interested in increasing your credit limit. A well-timed application can maximize the chances of your approval.
Here are the most favorable occasions for requesting an increase in credit limits:
A sizeable raise will increase your chances of approval. A higher salary allows you to cover the higher balances on your credit card easily. Hence, credit card companies are more likely to grant approval since they have greater confidence in your ability to pay off the more significant balances.
You might have to show proof of your increased income to gain approval for a higher credit limit.
Improved Credit Score
A good credit score indicates you are a responsible borrower who pays off their balance on time. People with good credit ratings borrow only those amounts which they can pay off. They don’t borrow more than their means.
Such responsible credit behavior is reflected by their credit scores. Credit card companies are inclined towards offering higher limits to such borrowers because they are more likely to pay back the debt on time.
Clean Track Record
If you paid off all your credit card debt on time and never reached your credit limit, then your chances for approval are better. High credit utilization and late payments indicate problems with the payment of borrowed amounts.
Make timely payments over at least six to twelve months to show consistently good credit behavior. When you request a higher credit limit, your credit card company will take notice of this.
When Should You Not Ask For a Credit Line Increase?
Also, there are times when requesting a credit limit is unfavorable. Don’t ask for a higher limit under these circumstances:
When You Have Applied for Other Lines of Credit or Higher Credit Limits Elsewhere
Requests for higher credit in quick succession may give lenders an impression you are in financial distress. Lenders are unwilling to extend money to such individuals since they are high-risk prospects.
Applying for loans or other lines of credit can cause a hard credit inquiry. This will appear on your credit history and hurt your credit score.
Although the impact on the credit score is relatively limited, too many hard inquiries in quick succession may deteriorate your record. Lenders who check your record may be deeply concerned. If your credit history is short, then this can be detrimental. Quick borrowing requests may give lenders the wrong impression.
Applications for higher credit limit may also set off a hard inquiry.
New, Lower-Paying Job
If you have recently chosen a lower-paying job, this is not the right time to ask for an increase in your credit limit. Lower pay means that your ability to pay back dues on time is reduced. Your credit card company has no reason to extend your limit.
Low Credit Score
This should be very obvious. A low credit score will diminish your chances of approval. However, you can try to improve your credit score. With discipline and commitment, you can raise your credit score. This will put you in a favorable position for higher credit limits.
If you have a travel plan, you are likely to become more carefree in your spending habits. This is not a good time to request a higher credit limit. You might spend heavily with your credit card during your tour. This can hurt your credit score and leave you with a hefty bill and substantial interest. Delay the request until you have finished traveling.
The Worst They Can Do Is Refuse. So Why Not Try?
Some people might think that a request for a higher credit limit has no consequences. But this is not true.
Unfortunately, a request for a credit limit increase can be detrimental to your credit score and history. Such requests often entail hard credit pulls, which can hurt both your credit score and history. Inquire from your credit card company if such a request may lead to a hard credit inquiry.
Also, a higher credit limit may not be in your best interests. If you continue to adhere to responsible credit card use, then a higher limit may not be such a bad idea. But if you feel that a high limit will tempt you to overspend, then it is wiser to avoid it. Before requesting a higher limit, resolve to spend responsibly, and not get carried away by the greater freedom.
There you have it–how to increase your credit limit, and when you should or shouldn’t try to. If you have good credit and you’re not carrying balances, it’s not a bad thing to request an increase every once in a while, even if you don’t use it. When I was a credit analyst years ago, utilization was one of the first things we looked at when deciding whether or not to increase someone’s limit. Just make sure you’re responsible if and when you do get that bump.