Life happens — unexpected expenses or big purchases can leave you wishing for more financial flexibility. A credit limit increase might seem like the perfect solution, but how does it impact your credit score? Let’s explore what happens when you request a credit limit increase and how it could affect your financial health.
What is a credit limit increase?
A credit limit increase raises the maximum amount of money your credit card issuer allows you to borrow on your credit card. It can provide additional purchasing power and potentially improve your credit utilization ratio. People often request a credit limit increase when:
- Preparing for large expenses, like home improvements or travel
- Seeking more flexibility for emergencies
- Wanting to reduce their credit utilization ratio to improve their credit profile
While a higher limit offers benefits, it’s important to weigh the potential impacts before moving forward.
How a credit limit increase can impact your credit score
A credit limit increase can impact your creditworthiness in several ways, depending on how the process is handled and how you manage your account afterward. Let’s break down the key factors that come into play.
Hard inquiries
When you request a credit limit increase, your card issuer may check your credit report to evaluate your financial health. They may perform a hard inquiry (sometimes called a hard credit check) as part of the process, which may temporarily lower your credit score by a few points. Hard inquiries are common when you formally request an increase.
Credit utilization ratio
Your credit utilization ratio is the percentage of your total available credit you’re using. A higher credit limit can lower this ratio if your spending stays the same, which could benefit your credit profile. For example, if you have $5,000 in available credit and a balance of $1,000, your utilization ratio is 20%. If your available credit increases to $10,000, your ratio drops to 10%, which helps improve your credit score.
Payment history
Regardless of your credit limit, consistently making on-time payments can contribute to a positive credit history.
Things to consider before requesting a credit limit increase
Before requesting a credit limit increase, take these factors into account.
Your financial habits
Can you manage a higher limit responsibly? While a higher limit offers flexibility, it’s crucial to avoid overspending or accruing more debt than you can afford to repay.
Recent credit activity
If you’ve applied for multiple new lines of credit or loans recently, this can be a red flag to lenders, as it looks like you’re taking on a lot of new debt. Consider waiting a little while before requesting a credit limit increase.
Issuer policies
Each issuer handles credit limit increases differently. Some may review your account and offer increases automatically, while others require a formal request, which could involve a hard inquiry. They may also require that your account has been open for a set amount of time before considering an increase.
How to request a credit limit increase
- Review your credit history: Ensure your credit report is accurate and free from errors. Responsible credit usage can help your chances of approval.
- Request the increase: Some issuers allow you to request an increase online or through their app. Or, you may have to call your issuer.
- Provide information, if requested: Be prepared to share details like your updated income and employment status to help your issuer assess your eligibility
Alternatives to requesting a credit limit increase
If you decide not to request a limit increase, there are other ways to manage your available credit effectively:
Open a new credit card
Adding a new credit card can increase your overall available credit but may involve a hard inquiry and require careful management to avoid accumulating debt.
Improve your credit utilization ratio
Focus on paying down existing balances to lower your credit utilization ratio, which can positively impact your credit profile without requesting a higher limit.
Takeaway: Making informed decisions
A credit limit increase can offer more flexibility and positively impact your credit if used responsibly. However, it’s essential to understand how the process works and evaluate your financial habits before requesting one.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
