In some cases, having good credit can be its own reward. After months or years of responsible spending, paying your credit card bills on time and keeping your debt-to-income ratio at a respectable level, you may receive a letter from your credit card issuer with good news. Your smart spending has resulted in an offer of a credit limit increase. But is it the right move for your lifestyle?
As it has been said before: great power comes with great responsibilities. While there are a lot of great things that can come from accepting a credit limit increase, there’s also some considerations everyone should take before taking the issuer’s generous offer. Before you take that credit limit increase, here’s what you should weigh.
How Do Credit Limit Increases Happen?
Credit limit increases happen in one of two ways. Cardholders can either initiate it with their card issuer, or the issuer can automatically increase the limit based on your current credit situation.
When the credit card issuer offers a credit limit increase, it is a direct reflection of your responsible use. In addition to considering your current credit report and credit score, issuers will also look at how you have used your credit. If all your indicators are positive, they may offer you a credit limit increase without asking – which is always a pleasant surprise!
On the other side, you can always go to your credit card issuer to ask for a credit limit increase. When you call, your credit card issuer will ask questions about why you want an increase, and how you plan on using it. From there, they may pull your credit and use your current profile to make a decision.
Although credit limit increases can happen, they aren’t always the boon they are made out to be. Without a plan or organization, it may not always be in your best interest.
Why Should I Accept a Credit Limit Increase?
There are two solid reasons why you should accept a credit limit increase on your credit card. First off, credit limit increases can improve your credit score overnight, with one quick adjustment.
The addition of additional credit shows in two different ways on your credit profile. First, the addition of available credit gives you a larger pool to draw from, which reflects positively on your credit report. Having high credit availability and lower balances shows responsible usage, which will raise your profile and increase your credit score.
But that’s not the only way that a credit limit increase boosts your credit score. Because you have more credit to work with across all of your cards, your debt-to-income ratio will drop. When it comes to financing major purchases (like a car or home), lenders will look at debt-to-income to determine how responsible you are with your credit. With a lower ratio, you will present as a better candidate to get loans at the lowest possible rate.
Why Should I Deny a Credit Limit Increase?
Although there are a lot of positives to taking a credit limit increase, it isn’t the right move for everybody. The additional credit can also turn into a negative in a hurry.
First off, having additional credit can create the temptation to spend more, or make bigger purchases with your credit cards. While this can be an easy way to earn points and miles, it can also result in bigger credit card bills, which can add interest to your balance. Unless you have a plan to pay off your debt in a reasonable amount of time, you shouldn’t necessarily take the credit limit increase just to spend more.
A credit limit increase can also create problems if you have authorized users on your credit cards. For instance: if you have a spouse or child as an authorized user, they will also have access to the additional credit available to you. If they are not responsible and decide to spend with the additional credit limit, you could be left on the hook for anything they decide to spend. Communication is critical in this situation. If they don’t understand how to be responsible, it could create problems down the line.
Should I Take the Credit Limit Increase?
If you ask for a credit limit increase, or you are offered one by your credit card issuer, it is a compliment to your ability to manage your money well. But before you accept that credit limit increase, it’s important to understand what that means and how it could affect your financial wellbeing.
First, ask why you want (or would accept) a credit limit increase, and how you will use it. If you are looking for a boost to your credit score, a credit limit increase could be a great way to help you increase your overall profile ahead of a major purchase.
Additionally, if you have a plan to make a big purchase and ultimately pay it down in a relatively fast amount of time, a credit limit increase can improve your buying power while rewarding yourself with points, miles, or a great low-interest offer.
But if you’re unsure how it will affect you, or worry it may create problems for your spending, a credit limit increase may not be the best option for your lifestyle. The additional credit can create a slippery slope of temptation, which can create large balances you lose control over quickly. Unless you have a goal for an increased credit limit, it’s wise to walk away.
Credit limit increases are not a bad thing, and can offer a lot of upside – so long as you have a plan to make them work for you. With planning and responsible use, you can make a credit limit increase work in your interest with every credit line you have.