10/9/2013 3:15 PM ET|
Should you increase your credit limit?
Make sure you need a higher credit limit before you ask for one. Sometimes an increase can hurt your credit scores -- but not always.
Some people assume that a credit limit increase will hurt their credit score. Some people only request an increase when they have charged up to their limit, while others will contact their credit card company for an increase without giving it a second thought.
There are many misconceptions about the reasons to ask for a credit limit increase and the best way to go about increasing your limit.
Why should you increase your credit limit?
Interestingly enough, increasing your credit limit can actually improve your credit score. According to MyFico.com, 30 percent of your credit score is based on your utilization percentage, which is calculated using the amount of available credit divided by the amount of your combined credit card balances. If you have a lower credit utilization percentage, then your score will increase, while a higher credit utilization percentage will decrease your score.
One way to increase your available credit is to apply for a new credit card, which will increase your overall amount of available credit. The other strategy is to call one of your existing credit card issuers and ask for an increase on a card. "Having higher credit limits do not hurt your credit. People often are frustrated that a credit card company increased their limit without them asking, but it is a good thing to have available credit, not a bad thing," says Liz Weston, personal finance expert and author of "Deal with Your Debt." "However if the only reason you are trying to get a higher credit limit is so you can charge more stuff, then it doesn't reflect well on your financial management and you most likely do not have a high credit score. You should ask for a higher limit if currently you are responsibly managing your finances so that you can increase your credit score."
Are there any downsides to increasing your credit limit?
Before the recent recession, consumers would simply call their credit card company and receive a credit limit increase. "For so many years it was easy to get your credit limit increased, but during the recession creditors began assuming that people who wanted increases were about to lose their jobs or were falling into financial trouble," says John Ulzheimer, president of consumer education for SmartCredit.com. "In recent years, people would call for a credit limit increase and when they hung up the phone, they found themselves with a lowered limit or worse, a closed card." Although the instances of credit card companies lowering limits have decreased recently, you should carefully weigh your situation before picking up the phone.
"If your credit is OK, but not great then I would advise you to get another card instead of asking for raise," says Weston. She says that consumers will excellent credit, such as over 750, will have a much better reception from their creditors when asking for a raise than consumers who have medium or poor credit. However, since different credit card companies use different formulas, there is not a magic number where it is safe to call to ask for a raise.
How to ask for a credit limit increase
If you have several credit cards, Ulzheimer recommends requesting a higher limit from a card that you use a lot and have a solid payment history. "If you have a card that you rarely use and have a lot of unused credit, then company will have little incentive to raise your limit because you are not generating revenue," Ulzheimer says. He also recommends being prepared to answer questions about your financial and employment situation during the phone call. "Keep in mind when asking for large credit increase, they will want to know more than just your score," says Ulzheimer. "If you do not provide the answers and information that they are looking for," you may walk away with a lower credit limit or closed card."
Ulzheimer recommends asking for a nominal increase, such as $500 or $1,000. "Most of the time if you have a good payment history then the creditor will give you small increase without pulling your credit report. However, if you ask for a larger amount, then the creditor will consider it an application for credit and will likely run your credit report.
So next time you consider asking for credit limit raise, stop and think through all of the scenarios. By understanding the process and ramifications of asking for a higher credit limit, you can successfully use this strategy to increase your credit score.
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Heck, why not? If it's good enough for the government, it's good enough for me!
Gonna call the boss next, tell him he needs to pay me more cause I spent too much money!
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