WHAT IS A CREDIT LIMIT?
A credit limit is the maximum amount of money you can spend using a credit card or other line of credit without receiving a penalty. Each lender will determine a borrower’s credit limit by taking several factors into consideration. These include, but are not limited to:
- Credit rating
- Personal income
- Loan repayment history
- Current debt-to-credit ratio
- The amount of collateral backing a secured line of credit
Generally speaking, most lenders will simply decline any spending that exceeds your credit limit unless you specifically allow overcharges. Some lenders will allow you to overspend by a certain amount, but will typically charge a fee each time you exceed your limit. Finally, if you exceed your limit more than once or twice in a short period of time, your lender may consider reducing your credit limit.
ADVANTAGES OF INCREASING YOUR CREDIT LIMIT
Whether you want to make a large purchase or simply need a buffer in case of an emergency, increasing your credit limit offers a number of benefits. These can include:
- Buying Power: Perhaps the most compelling advantage of raising your credit limit is the spending power it provides. An increased limit can be a great way to cover a large purchase. It also can help you avoid spending all your cash or dealing with store payment plans. Keeping all your major expenses in one place is a good way to stay on top of your payments.
- Rewards: Another great benefit to increasing your credit limit involves earning rewards. If you carry a credit card that offers spending rewards, increasing your limit and then using your card for large or recurring purchases can help you earn more rewards like airline miles, hotel points, or cash back. As long as you’re responsible about paying off your balance each month, using your credit card in this way can reap some excellent rewards.
- Consumer Protections: Beyond earning tangible rewards, paying for major purchases with a credit card can offer a number of protections not applicable when you pay with cash. Many major credit card companies offer benefits like warranties or coverage for lost or stolen items when you pay using their card. The ability to make more of your everyday and major purchases with credit provides a great extra layer of security.
- Emergency Funds: Even if you don’t have any upcoming expenses, having an increased line of credit is a good safety net in the event of unexpected emergencies. Emergencies like car trouble and medical bills can take people by surprise and cause serious financial damage to the unprepared. Ensuring you have sufficient credit to cover life’s unforeseen complications can offer a great sense of financial security and peace of mind.
- Credit Score: Beyond the obvious benefits of having more credit on hand, increasing your credit limit also can help increase your credit score. Your debt-to-credit ratio is a major factor in determining your credit score, so a larger line of credit that lowers this number is a simple way to improve your rating.
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DISADVANTAGES OF INCREASING YOUR CREDIT LIMIT
While increasing your credit limit offers many great benefits, it also brings a few risks:
- More Debt: The most obvious risk of increasing your current credit limit is the opportunity to take on more debt. If you routinely fall behind on monthly payments and carry a fairly large balance on your card, increasing your limit may not be the best financial decision.
- Hard Credit Inquiries: While an increased credit limit can help your credit score overall, requesting an increase often will prompt a hard credit inquiry that can cause your score to drop. If you have healthy credit and a low number of total credit inquiries, this shouldn’t cause a problem. However, if you have a spotty credit history and you’ve applied for several cards or requested several credit increases in a short period of time, you may want to wait before requesting another increase.
- Limited Loan Availability: It may seem counterintuitive, but carrying high credit limits, even in the absence of debt, can affect your ability to qualify for loans. Banks and other lending institutions look at your entire financial picture when deciding if you’re a good candidate for a mortgage or car loan. The mere possibility of accruing a large debt can appear as a liability and hinder your ability to secure approval for these loans.
HOW TO ASK FOR A CREDIT LIMIT INCREASE
When you’ve decided that increasing your credit limit is the right choice for you, it’s time to reach out to your lenders and make the request. Before doing so, you should have a firm grasp on your credit history and be prepared to prove you can handle the increase.
RESEARCH AND UNDERSTAND YOUR CREDIT HISTORY
When you’re looking to increase your credit limit, it’s important to understand your financial situation and credit history. This will be the deciding factor when it comes to a lender approving or denying your request. You can find this information within your credit report, which compiles your entire history as a borrower. There are several ways to get a copy of your credit report and credit score:
- Credit Card or Loan Statements: Some major credit card companies and other lenders provide customers with their credit scores on a regular basis.
- Credit Score Service: There are several services that will provide you with your credit report and credit score either for free or for a fee. AnnualCreditReport.com provides a free credit report every 12 months and Credit Karma® gives users constant, free access to their credit score and report through its website and mobile app.
- Credit Reporting Companies: If you’d rather go straight to the source, you can purchase your credit reports and scores directly from one of the three major reporting agencies — TransUnion®, Equifax®, and ExperianTM. You can also purchase your FICOTM score from myFICO.com.
Your credit report will outline your full borrowing history, including:
- The Good: Your credit report will provide a list of all your credit cards, loans, and other financial obligations in good standing. This means you’ve stayed current on all payments due.
- The Bad: The report also will list any accounts for which your payments are past due (usually more than 30 days) as well as other negatives against your credit, such as bankruptcy judgments, liens, foreclosures, or overdue child support payments.
- The Inquires: Finally, the report will include a list of everyone that requested a copy of your credit report. This generally includes all of your credit card companies and lenders.
Based on this information, your credit score will fall somewhere between 300 to 850. Lenders typically consider anything above 700 as good.
CONTACT YOUR CREDIT CARD COMPANY
When you’re ready to make the formal request for a credit limit increase, you’ll need to contact your credit card company. Many companies will allow you to request an increase online, while others may require you to call their customer service line. Making an online request typically involves logging into your account and completing a request form. Some companies will respond immediately with a denial or approval. If you’ve requested a large increase, it may take a few days to process your request.
If you plan to call your credit card company to request a limit increase, you should be prepared with all of the information you’ll need to complete the process. Requesting your increase by phone can help improve your chances of approval because you’ll have the opportunity to discuss your request and arrive at a new limit that feels comfortable to both you and your lender. Be ready to provide your Social Security number, employment status and income, monthly mortgage or rent payments, and by how much you’d like your limit raised.
Most importantly, you should be prepared to make a strong case for why you should receive a higher credit limit. These reasons may include:
- Years as a loyal card holder
- A long history of on-time payments
- Frequent use of the card
- A low balance
- Increased income
- Plans to make a balance transfer to the account
This last point can be a great way to entice credit card companies into granting you more credit while also offering you additional benefits. Many companies will raise your credit limit to allow you to transfer a balance from another credit card to theirs. In fact, many credit card companies offer 0 percent interest on balance transfers for a year or more. This allows you to consolidate debt and save money.
Once you’ve made your case, the issuer either will grant your requested increase, make a counteroffer, or deny your request outright. If the lender denies your request, be sure to ask for the reason behind the denial. While you’ll need to wait a while to make another request, understanding how you can improve your chances of approval will help you make the best financial decisions moving forward.
INCREASE YOUR SECURITY DEPOSIT (FOR SECURED CARDS)
While typical credit cards are considered unsecured, meaning they don’t require any collateral to open, some credit card holders opt for secured cards. A secured card requires a security deposit of anywhere from 50%-100% of the credit limit. This deposit will cover all or part of your debt, should you become unable to make payments.
If you hold a secured credit card, you often can increase your credit limit by simply increasing your security deposit. Most secured cards maintain a fairly low credit limit, but they make a great stepping stone for people looking to build good credit.
THE BOTTOM LINE
No matter why you want to increase your credit limit, educating yourself on your credit history and financial health — and preparing to make a strong case for yourself as a responsible borrower — can make the difference between a lender approving or denying your request. While most people see more benefits than negatives when it comes to increased credit limits, it’s always important to assess your full financial picture before you request a higher limit.