One of the simplest ways to raise your borrowing ability is by increasing your credit limit on your credit card. And when used responsibly, it can have a positive impact on your credit score.
Having that extra spending limit can increase your financial flexibility and prove useful in several ways. So how can you get a higher credit limit if you need one?
In this article we’ll discuss the inner works of credit limits, how to get a credit limit increase, and whether raising your credit limit is a good idea.
How credit limits work
When you pay with a credit card you’re essentially borrowing from a credit line with your card company. Your credit limit is the maximum amount you can borrow with this credit line.
If your credit use is low in proportion to your credit limit, you’re said to have a low credit utilization rate. But if it exceeds 30%, it can put pressure on your credit score. That’s why a low credit utilization – and a larger total available credit – is important.
Folks with higher credit limits have better credit scores, in general. Likewise, a higher credit limit and a low credit utilization is better for credit scores, other things being equal.
When determining your credit limit, lenders will look at several factors, including your credit score, credit report, and additional considerations such as:
1. Length of credit history
The more responsible you are with your credit use and the longer your credit history, the higher your credit limit is likely to be.
Credit card debt is unsecured borrowing, backed only by your promise to pay it back. So it’s understandable that credit card issuers look for customers who have a track record of timely payments over a long period of time.
This generally means that cardholders with short credit histories are less likely to receive a spending limit increase.
2. Household income and total debt
Before approving you for a credit offer, lenders review your income and your other debt commitments.
Applicants with higher incomes and lower total debt have a larger capacity to repay. This low debt-to-income rate or ratio makes them more attractive to lenders when reviewing requests for higher credit limits.
3. The current economic environment
Credit card companies tend to tighten their credit policies during difficult economic times. They know from historical information that missed payments and defaults trend upward during tough economic times.
So even applicants with good credit histories may receive a credit limit increase that isn’t as large as originally requested. Or worse – they may have their credit request denied.
How to increase your credit limit
If you’re ready to get a higher credit limit on your credit card, here’s how to do it.
Request a credit limit increase
Credit card issuers are used to receiving credit limit increase requests. So much so, that most have a simple online or by-phone application process to handle them.
If your credit card company doesn’t have an online process, you can always reach their customer service at the number on the back of your card.
In the case of AmEx, for example, you can request a limit increase online. Their “request credit limit increase” under their account services tab gets the process started. Cardholders need to answer a few questions including their annual income and the new credit limit they’d like to request, among others.
Also, be aware that a credit increase request may result in a hard credit check from your card company before they approve it.
Get a new credit card
When considering your credit limit, it’s useful to think of it in terms of your overall borrowing capacity across credit cards. Once you frame it that way, you can easily see why getting a new credit card can readily increase your overall credit limit.
Be mindful that applying for a new credit card will result in a hard pull on your credit. So it’ll lower your credit score temporarily by a few points. It’ll recover, though. Use your credit responsibly and give it a couple months.
If you want to get a higher credit limit to handle unexpected expenses, consider building an emergency fund. It’ll help you stay away from debt.
But if borrowing flexibility is what matters to you, applying for a new credit card from another issuer may prove useful. Some offers come with a 0% introductory rate on purchases and can help you manage large expenses.
Wait for a credit limit increase
Oftentimes, issuers will grant a credit limit increase after a period of time – generally six months – if you’ve been a responsible cardholder.
If you pay your bill on time, keep your credit usage low, and use your card with some frequency, you may be eligible for an automatic credit increase as you’ve demonstrated you can handle credit.
It’s a passive approach to raise your spending limit, for sure. But it’s one that can come your way unexpectedly if you have a very good credit score.
Improve your credit score
A higher credit limit may not be available to some people if their credit history is spotty. Luckily, there are some simple ways to improve your credit score.
Paying your bill on time is one easy approach. It demonstrates your ability to handle money and has a large positive impact on your credit score – and your ability to raise your credit limit.
Increase your security deposit
Secured credit cards help you build credit. These cards get their name from the security deposit they require. Your deposit acts as collateral in case of non-payment on your credit line.
If you own a secured card, call your issuer and inquire about a credit limit increase. If the card company raises your limit, you’ll need to increase your security deposit by the amount the lender approves.
Is increasing your credit limit a good idea?
Raising your credit limit has its advantages. It gives you more financial muscle. And a higher limit can help you improve your credit score.
But a higher limit could also be considered a red flag. It may tell a story that your debt is getting out of control and that you may need to find ways to reduce your credit card debt.
We weigh the pros and cons of increasing your credit limit.
Benefits of a higher credit limit
1. Reduces your credit utilization
When your lender increases your credit limit, the proportion of available credit you’re using falls and your credit utilization ratio goes down. This is good for your credit score.
Your credit utilization rate is a major component of FICO’s Amounts Owed factor which has a 30% weight in determining credit scores.
A low utilization ratio helps your credit score and can open the door to better terms on other financial products. It tells lenders that you aren’t overextended, have financial flexibility and are a sensible borrower.
2. Increases your purchasing power
Having higher spending power can help you handle life’s expenses and avoid cash flow problems. It can help you when you’re in a pickle. For example, when your family has grown and you need to spend more on travel arrangements.
On the flip side, a higher spending limit could be problematic to some. It can lead to changes in spending behavior and get some people into debt by blurring the lines between essential items and unaffordable luxuries.
3. Helps cushion unexpected expenses
Having a higher credit limit can give you peace of mind. Knowing you have the means to face unexpected expenses such as medical bills or costly repairs can ease some stress.
And a higher limit can help keep your credit utilization manageable when facing such emergencies,
Drawbacks of a higher credit limit
1. Can lead to higher credit card debt
Having a higher credit limit may give an illusory sense of being better off and boost your confidence. This can be dangerous when it leads to unaffordable spending and more debt.
Credit card debt is notoriously difficult to pay off once you start carrying a balance. The debt compounds daily and new purchases accrue interest when you carry a balance month to month.
2. May impact your ability to qualify for other loans
If it leads to more debt, a higher credit limit could impair your ability to secure future credit. Especially if your income doesn’t grow.
When you increase your debt faster than your income, your debt-to-income ratio increases. It’s an important figure for potential lenders: it gives them a sense of your existing financial commitments and your ability to service new debt.
But that’s not all. A higher credit limit could affect your ability to secure other loans even if it doesn’t lead to a higher debt-to-income ratio.
In fact, you don’t even have to get into more debt. Just having access to more credit can impact your ability to get other loans. Lenders often review the amount of credit you can tap when making their lending decisions. And very high credit limits may turn them off.
Can a higher credit limit hurt your credit score?
When you request a higher line of credit, it generally results in a hard credit pull from the lender. This type of credit check signals your intention to borrow and has a small, temporary impact on your credit.
But the initial effect can fade relatively quickly. Especially if your higher credit limit helps you keep your credit utilization low and you continue to use credit responsibly.
Credit card companies review your credit profile with some frequency and can reward responsible credit behavior with a higher credit limit. But you’ll need to use your credit card with some frequency, pay down your balance every month and pay on time.
You can often receive a decision instantly when you place a credit limit increase request online.