The Pros and cons of increasing your credit limit
Increasing your credit limit may seem like an inconsequential decision, but it’s one that could have real financial benefits and repercussions. Before accepting or requesting a credit limit increase, it’s important to carefully consider the pros and cons of even asking to raise your credit limit.
Increasing your limit means you’ll have more available credit. The obvious benefit of having a higher credit limit is that you’ll have a nice cushion of credit available for emergencies. Most experts advise having three to six months of wages saved up just in case, but it’s nice to know the credit is there if you need it.
A higher credit limit may also change your spending habits for the better. More credit means you can use your card for large purchases like renovations, electronics, and even taxes. If your credit card offers rewards for dollars spent, this is a great way to rack up the points as long as you can pay off your balance. Some also transfer everyday spending to their credit cards for this purpose.
If you can retain a nice buffer of available credit on your card and you can consistently pay off your balance, a credit limit increase can actually improve your credit score. Credit reporting agencies use something called Reduced Credit Utilization (RCU) to calculate credit score. To calculate RCU, they divide your outstanding debt by your available credit. More available credit means a lower RCU, which may ultimately result in a better credit score.
If you know you’ll be tempted to spend all of your available credit, a higher credit limit might be a catastrophic decision. More credit means more debt, and this debt can snowball out of control when you’re paying interest on a higher principal sum carried over month to month.
Even requesting a higher credit limit can negatively impact your credit score. If you’ve approached your financial institution to raise your credit limit, they’re likely to perform a Hard Credit Inquiry. They’ll pull information on your existing credit cards, loans, and credit lines to determine how likely you are to pay off your debts. A Hard Credit Inquiry automatically lowers your credit score, though only temporarily. Repeated Hard Credit Inquiries can have more significant repercussion for your credit score. Find out if your financial institution performs Hard Credit Inquiries before requesting a credit limit increase.
Although most credit cards have theft insurance, a higher credit limit means you’ll have more to lose if it’s ever lost or stolen. Inquire about limiting tap payments on credit cards to mitigate the damage that can be done.
When it comes down to it, if you’re able to pay off your balance and maintain similar spending habits, a credit limit increase can be a great financial decision.
More available credit should not be a license for wanton spending, so it’s good idea to take a close look at your financial history before increasing your credit limit.