We live in a world where it seems that more is always better. While that might be true most of the time and for most things, when it comes to credit limits there are a few things you should know. Let’s examine credit limit increases and see what they can mean to you and your credit score.
How does applying for a credit limit increase affect your score?
Much depends on how the request is initiated. Most lenders have a mechanism for requesting credit line increases; some will even automatically kick in if you meet certain guidelines laid out by the lender. In these instances, a limited or “soft” inquiry is usually made by your lender, which, as we have discussed previously in this space, will have no effect on your credit score.
However, if the increase is not automatic and you request it, some lenders may make a “hard” inquiry. This could pull your score down by a few points (probably no more than 10) and the effect will likely be short-lived. But the request will stay on your credit reports for two years. If you are concerned about the impact of a hard pull on your score, consider asking the credit issuer if a smaller increase request can be reviewed under a soft pull.
The good news is that whether you get an automatic increase or if your request is accepted, your credit utilization will go down. This will serve to bump your score up, since utilization accounts for 30 percent of your overall FICO score. This is assuming, however, that you don’t go right out and charge up a storm with your newfound increase.
But there is no free lunch as they say. Requesting new credit can trigger a drop from the “new credit” portion of your FICO score, which is worth 10% of your score. However, given the disparate weighting of the two factors you should come out ahead in the end.
As for the bad news, it is surprisingly modest. If your request is refused and you get no increase, the effect of a hard pull should be only a few points and shouldn’t have an effect on your score for more than a month or two.
When should I ask for a credit limit increase?
In much of life timing is everything. In credit this is particularly true. If you want to time your request for maximum chance of success I suggest asking for an increase if something positive has happened since you got your card, like an increase in your household income, a decrease in your debt load or an increase in your credit score.
Conversely, I don’t suggest you apply if any of the following has happened: you’ve lost your job or had an income cut; your credit score has decreased; you’re at or near (or even over) your credit limit; you recently missed a payment or paid less than the minimum; or you’ve recently added new credit.
In general, after six to 12 months of on-time payments, you may be eligible for an increase. You should make sure that those payments have been for more than the minimum required. Your current utilization on the account will also likely be taken into account in the decision, so try to keep your percentage at 30 percent or less to help increase your chances of being approved for an increase. These actions demonstrate a responsible use of the credit you already have.
Just like accessing new credit, you want to limit your requests in this area. Too many asks may signal that you are about to go on a spending binge. You might be turned down and if a hard inquiry was made, the hit you take from that might be felt more.
Numerous requests for credit or credit increases are never a good idea; the only time numerous requests won’t hurt you is if you are in the market for a big-ticket item, like a mortgage or a new car loan. (In that case try to cluster your rate shopping in a short period of time so the multiple inquiries will be counted as only a single request.) You need to know that too many credit card applications or credit line increase requests are like a red flag to the scoring mavens.
Should I increase my credit limit if offered?
If it is offered, chances are your credit wasn’t accessed in a way that will hurt you and an increase will help your utilization score. However, if you feel that an increase may be too tempting and be reflected in overspending (now you can get that big screen TV you’ve been lusting after) you might want to think twice. This is a question only you can answer, but it is an important one. Most of you know, but for those who don’t, more credit is not the same as more income. It’s just another way to spend the money you already have budgeted.
How to increase your credit limit without hurting your score
As noted earlier, most lenders have a mechanism for asking for an increase. This can usually be done either by phone or via the internet. Your lender will want some information from you to consider your request, whether a hard pull is done or not. This will include your current income and employment information. You can ask if a hard pull will be done and, as noted earlier, if one can be avoided at a lower increase threshold. I would suggest that you always ask for your own information.
Before you make any decisions like this, I would also suggest that you check your credit reports for yourself. You can do this for free at AnnualCreditReport.com; reports from all three bureaus (Equifax, Experian and TransUnion) are available weekly through April 2021 because of the COVID-19 pandemic. This service is usually only available once a year (hence the “annual credit report” moniker).
Just like taking on any new credit, this is a step I always recommend be done so that you know what is in your reports. It will benefit you by allowing you the time to correct any errors you find and be sure that your credit is in tip-top shape.
Have a credit score question for Steve? Drop him a line at the Ask Bankrate Experts page.