Does Increasing Your Credit Limit Affect Your Credit Score?

In a world where credit can affect everything from your home loan to car insurance rates, it’s no surprise that everyone is looking for ways to improve their credit scores. Although significant improvements take months, sometimes years of responsible credit usage and money management, increasing your credit limit can provide more immediate results.

Before you rush to contact your bank or credit card company, raising your credit limit isn’t always a good solution. Let’s dive deeper into the benefits and drawbacks of increasing your credit limit.

Why increase your credit limit?

The main reason you might want to increase your credit limit is to lower your credit utilization ratio, which can boost your credit score.

When people talk about their credit score, they are often referring to their FICO score. These scores are a calculation that includes five major factors of varying statistical importance. The amount you owe is the second most important category when calculating your FICO Score. This debt is often represented as your utilization ratio, the amount you owe over your maximum credit limit.

For example, if you consistently utilize $600 of credit and have a credit limit of $3,000, your utilization ratio would be 20%. Now, imagine that your credit limit was raised to $6,000. If you kept your spending the same, your utilization ratio would only be 10%.

A lower utilization ratio, when combined with a consistent and lengthy payment history, indicates that you are a safe borrower, causing your credit score to rise a few points each time your credit score is recalculated. Over time, these increases can make a huge difference.

When should I request a credit limit increase?

Increasing your credit limit could help your credit score, but when should you take action?

Consider the following factors before you request a credit limit increase:

Credit Inquiries

New credit accounts for an estimated 10 percent of your score. Each time you take on new credit, the lender will perform a hard credit check on you, which can temporarily lower your credit score.

The good news is credit bureaus generally do not count every hard inquiry against you. Instead, they consider all inquiries made within a 30 to 45-day timeframe as one hard credit check. This means you can apply to increase your credit limit with multiple banks without additional penalty.

It’s also important to remember that new credit inquiries only stay on your report for two years, which is significantly less time than other aspects like payment history and bankruptcy. If you are planning to apply for a mortgage, there are some credit considerations you should take into account beforehand.

Limit Denied

Decreases in your score due to a credit inquiry will be outweighed by a lower utilization rate, but you should consider what happens if your request is denied. For this reason, only apply for a limit increase if you are confident your payment history will warrant one. If you’re in a position where a few points are making all the difference, avoid facing the negative effects of an inquiry with no promised benefit.

Tempting Balances

Beyond all else, consider how a higher limit may be tempting if you tend to overspend. The whole point of raising your credit limit is to lower your utilization rate. If you can’t resist spending more of your new credit, you may be better off keeping that card hidden away and paying off the balance to raise your score.

How to Increase Your Credit Limit

Typically, you can approach your bank or credit card company online, over the phone or at a physical location to request a credit increase. You must provide them with financial information, such as your monthly spending and income. Additionally, your bank may ask for the specific number you’re requesting, so make sure to have one in mind.

Remember, this request for new credit will likely result in a hard check on your account. Make sure that you’re confident you have sufficient reasoning to be approved, and if you’re denied, that you’re able to recover from a drop in score.

Your bank may also automatically increase your credit limit as you deliver consistent payments and your score increases. Automatic credit limit increases typically come after a soft inquiry on your account, which will not affect your credit score.

The Bottom Line

Increasing your credit limit can potentially help your credit score a few points, but it can also hinder your progress. Before you put your finances in a position to be scrutinized, carefully consider your situation to ensure the benefits are worth it. If you’re a service member who needs help overcoming credit hurdles, contact our credit consulting team for free assistance and to get you one step closer to homeownership.