11/21/2013 4:45 PM ET|
When should you request a credit increase?
A boost to your credit limit might be the thing you need to give your finances a shot in the arm. Proceed with caution, though.
A consumer’s credit utilization ratio has a big impact on his or her credit scores, so it’s best to keep the difference between your debt and credit limit as great as possible.
With that in mind, it may seem like a good idea to request a credit limit increase from your card issuer. However, like all financial decisions, this should be done thoughtfully.
Reasons to request a higher limit
If you’re looking to lower your credit utilization ratio, the obvious option is to spend less and pay down your debt, but that’s not always easy to do. And if you’re paying your bills in full and on time, you shouldn’t have to reduce spending for the sake of your credit score. Requesting a higher limit while maintaining the same level of spending will raise your credit score.
This is especially helpful for those with rewards cards looking to maximize their benefits, as these cardholders may use their credit quite frequently, leading them to bump up against their limits.
If you’re working to pay down credit card debt, you could also benefit from a credit limit increase. It’s important to note that a higher limit isn’t an invitation to spend more; it’s a short-term step toward healthier credit in the future.
Gerri Detweiler, director of consumer education for Credit.com, explained a possible scenario: Say you have two credit cards, one with a lower interest rate and one with a higher interest rate. If you want to transfer the balance of the high-interest card to the low-interest card but need a higher limit to do so, talk to the card issuer about your plan. This may entice them to increase your credit limit.
Things to consider
Requesting a higher credit limit may shave a few points of your credit score at first, but it should be a small, short-term price in a long-term plan for better credit health.
“If you’re not heavily shopping for credit, an inquiry shouldn’t be a major impact on your score,” Detweiler said. Basically, don’t ask for an increase if you’re about to close on a mortgage or take out a loan.
You also don’t know what the limit increase will entail, Detweiler said. Some issuers may do an account review inquiry, which is a soft pull and doesn’t impact credit scores. Others may do a hard inquiry, but only through one credit bureau. Regardless, if an increase will improve your credit utilization, losing points through an inquiry will be temporary ding with a log-term benefit.
Should the issuer deny the increase request, the inquiry appears the same way on a credit report as an approval would. Even without the benefit of a higher credit limit, that inquiry should make a very small, short-term difference in credit scores.
After the financial crisis, issuers cut back on credit limits, hurting consumers’ scores in the process. They have since loosened those restraints, which is good news if you were among those cardholders who took a hit.
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