If you’ve been using your credit responsibly, there’s a good chance that your financial institution will offer you a credit limit. This could come when you’re doing online banking, at the branch, or you may even get an offer in the mail. Before you accept or decline, you should be asking yourself one question: Does increasing your credit limit affect your credit score?
Does requesting a credit increase help/hurt your score?
Requesting a credit increase can hurt and help your credit score at the same time. Although that may sound odd, it really comes down to how the credit limit increase was initiated and what you do with the limit increase.
Soft credit checks are occasionally done by lenders to see what products their existing customers may qualify for. During a soft inquiry, there’s no drop to your credit score since no hard check performed against your credit profile. It’s simply a quick way to see your credit score. If your credit score meets your financial institution's threshold, they may pre-approve you for a credit limit increase. It doesn’t matter if you accept or decline the credit limit increase your credit score won’t be affected.
Now let’s say your bank hasn’t made any offer of a credit limit increase, but you would like one. You could call up your bank and ask for one. Since you haven’t been pre-approved, your bank may need to run a hard inquiry against your credit profile to see if you qualify. This would normally result in a small hit to your credit score of about 5 to ten points.
Credit utilization ratio
Regardless of if your credit score took a hit or not, it may actually go up once you’re approved. That’s because one of the major factors that determine your credit score is your credit utilization ratio. That’s the amount of credit relative to the total amount of credit you have access to. For example, let’s say you have a credit limit of $5,000 and you regularly charge $2,500 to your card. That would put your credit utilization ratio at 50%.
Now let’s say you accepted a credit limit increase, and your new limit is now $10,000. That means your credit utilization ratio would drop down to 25%. That’s below the typically recommended ratio of 35%. In this case, you could see an increase in your credit score. That said, if you decide to max out your new limit, you’d have a higher credit utilization ratio, which could decrease your credit score.
What are the benefits of increasing your credit card limit?
Besides a potentially higher credit score, increasing your credit limit can help you in other ways, such as:
Increased purchasing power: An increased limit means you have the ability to spend more. This can be useful if you have a major purchases coming up, such as travel, home renovations, or tuition. Without a high credit, you may be forced to pay for part of your purchases in cash, which may not be convenient for everyone.
Allows you to manage your finances: As long as you pay off your full credit card balance by your statement date, you’re getting an interest-free loan. An increased credit limit would give you some flexibility since you don’t need cash upfront to pay your bills.
Gives you access to cash/credit in an emergency: Credit cards have high interest rates, so they shouldn’t be relied on in any true emergencies. That said, if your emergency fund isn’t fully funded or you’re facing a cash crunch, an increased credit limit can help you temporarily get by.
What are the disadvantages of increasing your credit limit?
Even though getting a higher credit limit can help you, there are also some drawbacks to consider.
You may spend more: Having access to more credit may encourage you to spend more. That’s because you’ll have more buying power.
Potential Interest payments: Most credit cards charge interest of 20% to 24%. If you’re not paying your full balance each month, the interest charges could add up to quite a bit.
False sense of security: Having access to a lot of credit may encourage people to save less since they know they have a high credit limit to fall back on.
How many points does a credit limit increase affect your credit score?
Your credit score is not affected at all if you accept a pre-approved credit limit increase. However, if a hard inquiry is performed, you should expect to see an immediate decrease in your credit score of five to 10 points. That said, if your credit limit increase lowers your credit utilization ratio, you would see your credit score increase over time. It’s impossible to say how many points your credit score would increase because your credit utilization ratio is just one factor that affects your credit score.
Credit limit increase and if it affects credit score
Your credit history plays a vital role when it comes to credit limit increases. Credit card issuers look at your credit history to assess how you’ve handled credit in the past. If you've been responsible with repaying loans and bills on time, credit card companies are more likely to trust you with larger amounts. This shows that you are a low-risk borrower.
However, this does not mean that you should aim for a higher credit limit just to try and build your credit history. It's important to remember that credit should be used responsibly. If you don't need the extra credit provided by the increased limit, it might be wiser to reject it.
It’s important to note that a higher credit limit may contribute to a better credit score mainly through its impact on your credit utilization ratio. This ratio, which is your credit card balance relative to your total credit limit, affects 30% of your credit score - the most commonly used credit score model.
Is a credit limit increase a soft pull?
A credit limit increase is typically considered a soft pull. Note that if you’re applying for new credit, such as another credit card, that would be considered a hard pull. Any new credit applications would decrease your credit score.
Is it bad to have too high a credit limit?
There’s nothing wrong with having a high credit limit as long as you use it responsibly. Having a higher credit limit usually means you’ll have a lower credit utilization ratio, which can be good for your credit score.
It doesn’t matter if your credit limit is $1,000 or $20,000. As long as you’re paying your bills in full and on time, you’ll be in good shape since you’ll be avoiding any interest charges.
That said, if you’re concerned that a high limit may encourage you to spend, you could always request your limit to be lowered. Just make sure you don’t lower it to the point where your credit utilization ratio increases significantly.
How to get a credit limit increase
If you’ve decided that you’d like a credit card limit increase, getting it in place is pretty straightforward:
Accept the pre-approval: Assuming you’ve already been pre-approved for a credit limit increase, all you need to do is say yes when the offer is prompted. This can happen when you’re banking online, over the phone, or even in a branch.
Contact your credit card provider. You can still get a credit limit increase even if you haven’t been pre-approved. Just contact your credit card provider and they’ll be able to pull your credit profile right away to see if you qualify. If approved, your credit limit increase will happen immediately.
Credit limit increase alternatives
Instead of accepting a credit limit increase right away, consider some of the following alternatives:
Apply for a new credit card: Although a new credit card application will result in a hard inquiry on your credit profile, it can still work to your advantage. A new card comes with its own limit, so your total access to credit will increase. In addition, you may get a welcome bonus and benefits that come with the new card.
Get a prepaid card: Prepaid cards won’t increase your credit limit, but they can help you keep your spending under control. That’s because with prepaid cards, you can only spend the funds that you’ve loaded. Since prepaid cards use payment networks such as Mastercard and Visa, you’ll still be able to make online purchases.
Lower your existing debt: If your goal is to increase your credit score, you should try to pay off any outstanding debt. This works in your favour since you’ll be lowering your credit utilization ratio.
The bottom line
If you’re ever offered a credit limit increase, it’s often a good idea to accept it. That’s because it’ll give you more purchasing power and it could even increase your credit score. In addition, accepting a credit limit when you’re pre-approved and don’t need it is a lot easier than asking for it later when financial institutions might be cutting back on credit that’s being extended to its customer base.
Barry Choi is an award-winning personal finance and travel expert. He regularly appears on various shows in Canada and the U.S., where he talks about all things money and travel. His website - Money We Have - attracts thousands of visitors daily, looking for the latest stories on travel and money.