ByCarolyn Osorio
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From applying for credit cards to qualifying for loans to passing credit checks for rentals, having a solid credit score has always been important for consumers. However, low credit scores can make an already challenging housing and economic market today even more complicated to navigate. Still, it's important to remember there are many different ways to help build your credit back up and/or even boost an existing solid score. One technique you might not already know about involves increasing your credit limit.
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One of the most important terms to keep in mind when discussing your credit score is something known as a credit utilization ratio. This ratio compares how much credit is available to you to how much of that credit you've already used/spent. Note, this ratio typically only applies to revolving credit like credit cards, rather than installment credit like a car loan.
When it comes to calculating your ratio, as an example, if your combined credit limit on two credit cards is $10,000, and you've spent $1,000 on one card and $2,000 on the other, your credit utilization ratio would be 30%. This percentage can signal to lenders and banks how financially responsible you are, as well as signal how likely you are to be able to pay back your debts. High utilization ratios can indicate difficulties with paying back debts, which can — and does — negatively impact your credit score. Changing this ratio is the ultimate goal behind raising your credit limit.
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Your credit limit and your credit score
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One of the simplest ways to help boost your credit score can be to simply increase your credit limit. This goes back to the concept of the credit utilization ratio, which the Consumer Financial Protection Bureau says should stay below 30%. If your expenses and purchases remain the same every month, raising the credit limit on your accounts can ensure you end up with a lower overall utilization ratio. For example, if your new combined credit limit is $20,000 and your expenses remain $3,000, then your ratio would now be 15% and this lower utilization will result in a positive boost to your credit score.
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However, there's also a lot to know about when, exactly, to request a credit limit increase. While you can technically request an increase at any time, waiting until you have a more solid credit history can make you more likely to qualify, according to Severine Bryan, an accredited financial counselor. As Bryan said to Bankrate, "Creditors are more likely to reward good money behaviors with an increase. A good reason to request a credit increase is if you are in danger of using the maximum on the card and need some extra wiggle room. This will allow you to protect your credit utilization rate. Another good reason is to increase your spending power by having more credit available to you." Applying for an increase after a raise, a rise in credit score, or a significant reduction in debt can all positively contribute to your chances.
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Potential drawbacks of a credit limit increase
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It's important to realize that increasing your credit limit does not necessarily guarantee a complete credit transformation. Not only can increasing your limit not solve all of your potential credit issues, but it can actually negatively impact your credit score. This is part of why choosing the right time to request a credit limit increase is so important. If you request a credit limit increase immediately after losing a job, experiencing a credit score drop, or when you're already almost at your existing credit limit (meaning a high utilization ratio), you're much more likely to be denied.
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Similarly, poor financial circ*mstances could ensure the credit card company you've requested an increase from runs a hard credit check as opposed to a soft one. This hard credit inquiry can even further negatively impact your credit score. If you are unsure if your credit card company will run a hard or soft credit check for increasing your credit limit, it can be worth contacting them ahead of time to verify their policies and save yourself the unnecessary credit hit.
Also, remember that the length of your credit history is another contributing factor to your overall credit score. This means it can be especially important to resist the temptation to simply get a new credit card. Focusing instead on improving the credit limit of your already existing credit cards can help you improve your score in more ways than one while also avoiding the hard credit check of a new credit card application.
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