When’s the last time you pushed for a credit line increase?
If it was less than 6 months ago, you should give your credit card company a call.
Getting a credit line increase is the one of the most important things you can do to improve your credit score. Since improving your credit score can save you hundreds of thousands of dollars over your life, it’s worth the effort.
Even better, it’s one of those “set it and forget it” wins. Once you get it done, you’ll keep benefiting from your credit line increase every year.
What is a Credit Line Increase?
When you originally applied for your credit card, the issuer set a credit limit based on your financial history and credit score at that time. If you’d made some credit missteps in the past, or didn’t have any credit history, your credit line might have been pretty low.
As you demonstrate your ability to handle your credit well, the credit card company may give you a credit line increase. You’ll be able to spend a higher amount on your credit card each month before it starts getting declined. Essentially, this allows you to borrow more money.
The Pros and Cons of Credit Line Increases
Credit line increases can benefit your credit score and give you more flexibility with your finances. But there are some potential downsides as well. Here’s a look at the pros and cons of a credit line increase.
Pro: Higher Credit Score
Getting a credit line increase can help boost your credit score by lowering your credit utilization ratio. Your credit utilization ratio is the total amount of revolving credit you’re currently using divided by the total revolving credit you have available. For example, if you have a credit card with a limit of $1,000 and a balance of $500, your credit utilization ratio is 50%. A utilization ratio of under 30% is usually considered good, although keeping it under 10% is better.
With a credit line increase, you can borrow more while staying within a healthy range.
Every time you get a credit line increase, your current monthly spending will have a lower credit utilization. Assuming you don’t increase your spending. By methodically increasing your credit line every year, you can get your credit utilization from 30-40% down to 5% even while you spend the same amount every month. This, in turn, grows your credit score faster.
Pro: More Flexibility in Spending
We strongly advocate that everyone pays off their credit cards every month. It’s the only way to make credit cards a good deal.
But sometimes, life throws us challenges. Hopefully, we have an emergency fund on hand. What happens if that runs dry? Credit cards can give a temporary cushion.
While it’s not good to make a habit of maxing out your credit cards, I’d much rather have a higher limit if my back is against the wall. Once times get tough, it’ll be much harder to get a credit line increase. Get higher limits when times are good so it’s there if you ever need it.
Pro: Get Get Rewards on All Spending
With a low limit, you might not be able to fit all your spending on your credit card each month. Any charges that end up on your debit card won’t get rewards. So an increasing your credit limit to handle your monthly spending gets you as many rewards points or cash back as possible.
One trick around this: make multiple payments to your card each month. If you have a limit of $500 and spend $1000 monthly, you could spend $500, pay $500, then spend another $500. This does become a pain after a while so it’s nice to have a high enough limit to handle your ongoing spending.
Con: Being Tempted to Spend More
Having access to more credit could tempt you to go on a spending binge, but it shouldn’t. If you get a credit line increase, don’t increase your overall spending. After all, you didn’t get a raise.
Continue spending within your budget, low enough that you can pay your balance in full each month. If you overspend and can’t pay off your balance in full, you’ll have to pay more in interest, and that interest will likely wipe out the value of any cashback rewards or other perks you might get from using your card.
Con: Lowers Your Credit Score Temporarily
If your credit card issuer grants a credit line increase unprompted, a soft inquiry will show up on your credit report. Soft inquiries don’t impact your credit score.
However, if you call the company to request a credit line increase, they may make a hard inquiry on your credit report. A hard inquiry can temporarily lower your credit score by five to 10 points. If you want to ask for a credit line increase but don’t want the hard inquiry, call your lender to ask whether they check credit. Some issuers may be able to give you a small credit line increase without checking your credit first.
After a few months, this won’t matter and your credit score will recover. Just don’t request a credit line increase right before you apply for a major loan like a mortgage or auto loan.
When to Expect a Credit Line Increase
If you’re a new credit card holder who initially received a very low credit limit, the issuer might grant you a credit limit automatically. However, most credit card issuers won’t automatically increase your credit limit unless you’ve been making on-time payments and staying within your credit limit for at least six months to a year.
If you want an increase to your credit card limit, make sure you’re taking the following steps to demonstrate that you know how to use credit cards responsibly.
- Pay your bills on time. This is one of the cornerstones of a good credit score.
- Pay more than the minimum balance. While credit card issuers like customers to use their cards, making only the minimum payment each month can signal that you’re having financial troubles. You should really be paying it off in full every month.
- Keep your credit utilization ratio under 30%. This means per card and overall. You’re better off spreading your spending across several cards than having one card that is almost maxed out.
- Actively monitor your account. Keep an eye on your credit card balance throughout the month and look out for any unusual activity so you can dispute fraudulent charges immediately
- Monitor your credit report. Unfortunately, identity theft happens all too often. Keep an eye on your credit report to ensure someone isn’t applying for new credit in your name or charging on accounts you thought were inactive. Dispute any errors or fraudulent activity with the three credit rating bureaus immediately.
As long as you’re following these habits, you should be able to request a credit line increase each year.
How to Get a Credit Line Increase
If you’ve been managing your credit well for a while but haven’t received an automatic credit line increase in the last year, call your credit card issuer and ask for one. You might also be able to request a credit line increase online.
If you’re earning more income now than you were when you initially opened the account, this can work in your favor. Credit card issuers usually view an increase in income as being able to over an increase in credit card spending. However, they might ask for proof of your new income before approving you for a higher limit. They might also ask about your other debt limits as well as your rent or mortgage payments when evaluating your request.
Don’t be discouraged if the credit card issuer denies your request for a credit line increase. Just keep paying your bills on time and keeping your credit utilization low. You can try again in six months if you continue to manage your credit well or start making more money. If all else fails, you can apply for a different card (and potentially get a higher credit limit) when your income and credit score are higher.
If you have more than one credit card, don’t try to get credit line increases on several cards at the same time. A flurry of hard inquiries on your credit report is a red flag to the credit rating agencies that you might be having financial troubles, and it can actually lower your credit score.
Is There Ever a Time to Decrease Your Credit Line?
Asking for a decrease in your credit line is usually not a good idea. It can increase your utilization rate, thus lowering your credit score. The only time it might make sense is if you’re tempted to overspend on your credit cards. Even then, you’re probably better off cutting up the card (but keeping the account open) or freezing it in a block of ice in your freezer rather than requesting a lower credit limit.
There really isn’t a time when you want a lower limit. But it can be forced on you.
During recessions, credit cards get a lot stingier with credit limits and approval. And when things get really rough like they did during the 2008 recession, they do lower limits on some customers. Remember that your credit card terms can change at any time.