Let’s Learn About: How a Credit Limit Increase May Affect Your Credit Score
Increasing your credit limit may help your credit score if you keep your credit utilization low
If your lender does a hard inquiry to approve your credit score increase, your score may go down
An increase in income can make you eligible for a credit limit increase
Your credit limit is the maximum balance you can have on your credit card. Increasing your credit limit could help your credit score, leave it unchanged, or lower your score, depending on the circumstances.
Find out what factors could cause you to hurt your credit score, and when it’s the right time to ask for a credit limit increase.
How can increasing your credit limit affect your credit score?
All things being equal, increasing your credit limit will reduce your credit utilization ratio. The credit utilization ratio is the amount you owe as a percentage of your credit limit. A low credit utilization ratio may help your credit score more than a high ratio.
If you increase your credit limit, your spending habits remain about the same, and you continue to make on-time monthly payments, your utilization ratio would go down, and this could impact your credit score.
However, if you increase your spending too much after increasing your credit limit, your credit utilization ratio will increase, and that may negatively impact your credit score.
For example, if you have a $1,000 credit limit and spend $500 before you pay the bill, that’s a 50 percent credit utilization ratio. But if you get a credit limit increase to $2,000 and then spend $1,500 before you pay the bill, your credit utilization ratio will go up to 75 percent.
The Consumer Financial Protection Bureau recommends keeping your credit utilization ratio under 30 percent.
Your credit score may also be affected by a credit limit increase because of a hard inquiry. When a lender obtains a copy of your credit report to decide whether to grant your request for additional credit, this results in a hard inquiry on your credit report. Hard inquiries usually do not have a significant impact on your credit score unless many occur in a short period of time.
When to ask for a credit limit increase
Asking for a credit limit increase at the right time could affect your chances of being approved. Consider these things before requesting a credit limit increase.
- You Received a Raise: Reporting an income increase could show credit card issuers you have the ability to handle more debt.
- You Make On-Time Payments: Credit card issuers take into account how reliably you make payments on all of your loans.
- You Have a Low Credit Utilization Ratio: Using only a small percentage of your available credit shows that you can handle credit responsibly.
- Your Credit Score Is Good to Excellent: Credit card issuers are more likely to issue additional credit if you have handled your existing credit well.
You can request a credit limit increase on your Discover Card by logging into the Discover Account Center, selecting “Card Services” and then “Credit Line Increase.” Or on your Discover Mobile App, select “Services” and then “Credit Line Increase.”
You can also request a credit line increase by calling the phone number on the back of your Discover card.
What you should consider before requesting a credit limit increase
- You Applied for a New Line of Credit: Applying for a new line of credit and requesting a credit limit increase can both result in a hard inquiry. Multiple hard inquiries may negatively impact your credit score and potentially show financial hardship.
- Your Income Has Decreased: If you recently transitioned to a lower-paying job, it could affect being approved for a credit limit increase.
- Your Credit Isn’t Good: If your credit isn’t good, it may be best to work on improving your credit score before requesting a credit limit increase.
Automatic credit limit increases
Requesting a credit limit increase isn’t the only way to get one. If you have used your credit card responsibly and have made on-time payments, your credit card issuer may automatically increase your credit limit.
A credit limit is the maximum amount of money that you can borrow from banks using credit cards.
The credit limit is revised mostly during the revision process. If you have a good credit track record, then you may be offered a credit limit increase. There is a common misconception that an increase in credit limit will affect credit scores negatively. However, the fact is that it has both, advantages and disadvantages. Here is a list of both.
List of Advantages
- Improved credit score - A higher credit limit can result in a lower credit utilisation ratio. It also becomes a bargaining tool for getting a bigger loan. A lower credit utilisation ratio improves credit score and therefore, better chances of easy credit availability in the future.
- Helpful in emergencies - A higher credit limit can prove helpful during emergencies such as sudden hospitalisation which requires large payments to be made upfront.
- More purchasing power - A credit card with a higher credit limit allows big-ticket purchases, like white goods, expenses related to annual vacations, etc.
List of Disadvantages
- Results in reckless spending - Compulsive shoppers can easily go off-budget by recklessly spending with the higher credit limit. This can have a negative impact on the credit score.
- Security risk – In case the safety of the card is compromised, the monetary damages can be significant. To avoid the risk of fraud, users must try and set up alerts that can inform the bank whenever a transaction does not match their normal spending pattern.
- High-interest expenses - Since an increased credit limit means greater spending, there are higher chances of the cardholder not repaying the amount every month. This results in high-interest expenses.
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