When should you accept a credit limit increase?
If you've had a credit card for a while, or if your income has recently increased, you might be thinking about asking for a credit limit increase. You can usually request a credit limit increase on your credit card’s website or by calling your credit card issuer.
Can requesting a credit limit increase hurt your credit? Just like when you apply for a new card, credit card issuers might initiate a hard inquiry on your credit score, which can cause a temporary dip in your score.
Automatic credit limit increases
Recently, my credit card company increased my credit limit without asking, which is known as an automatic credit limit increase. This can happen from making consistent on-time payments, because you’re a longtime cardholder, or because you’ve reported an increase in income.
I was OK with it, but it got me thinking: Is a credit limit increase always a good thing? While it can certainly be beneficial, particularly when it comes to your credit score, there are some instances when you may want to think twice before you accept a credit limit increase. Here’s what to know.
When you might want a credit limit increase
An increased credit limit can have a positive impact on your credit score, thanks to something known as credit utilization, which is basically the percentage of available credit you’re using. For example, if you have a credit limit of $10,000 with a balance of $3,000, your credit utilization would be 30 percent. But if your credit limit was bumped up to $15,000 and you kept the same balance, your credit utilization would drop to 20 percent. Many credit scoring formulas look at credit utilization as a significant factor that affects your credit score, and a lower utilization is better.
Having a higher credit limit gives you more ability to spend, which can translate into greater rewards. So if you’re financially stable and use credit cards for the convenience and the perks, having a higher credit limit can be particularly attractive, according to Bruce McClary of the National Foundation for Credit Counseling (NFCC).
“You may have reached a point where your credit history and financial behavior have earned you a top credit score, which qualifies you for credit cards that might reward you for your spending,” he says. So if you have a trip or a big home renovation in mind, as long as you can pay your bill in full and on time, using a card with a larger credit limit can help you earn extra cash back or rewards points.
When you might not want a credit limit increase
On the other hand, if you’re just starting out and still building your financial life, an increased credit limit might not do you any favors. “Strictly from a money management and budgeting standpoint, when you're early in your career and just out of college, you may already be carrying a lot of student loan debt and have other financial obligations,” McClary says. “You don't want to create new debt that could get in the way of managing those top priorities.”
Having a higher credit limit can make it tempting to use your card. Should you become reliant on credit cards and run up a balance, you’ll increase your credit utilization and negatively impact your credit score. Limiting your access to credit can help you keep your spending on track as you continue to develop good credit card habits. “You don't have to be taking on all these big credit increases early on in order to responsibly establish a good credit score and a healthy credit history,” McClary said.
Another example of when you may not want a credit limit increase is if you recently applied for additional credit, or are planning to. “If there's frequent activity showing regular credit limit increases, this raises questions when you go to apply for things like a mortgage or car loan,” McClary says. “It could lead lenders to think that you might be a risk because something is about to happen where you're needing all this increased room on your lines of credit.”
How to avoid an automatic credit limit increase
While some credit card companies might offer an increase in advance, others (like mine) could increase your credit limit without asking. If you don’t like the idea of an automatic increase, you can try and prevent this from happening by simply asking them not to do it. “Put it in writing so that it’s flagged and part of your account,” McClary says. “I’ve actually done this myself, and it does work. They don't want to make you mad, since that's not a good way to keep a customer.”
If you’ve already been given a credit limit increase that you don’t want, you can reject it. But McClary warns that doing so could backfire. “If the increase has already had an impact and been reported on your credit history, lowering it could actually cause your score to go down,” McClary says. However, he adds this should only affect your credit score in the short term and likely won’t have a major impact.