Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Updated on Wednesday, April 8, 2015
One day you may open your email to find a notice from your credit card company, “Congratulations, you’ve been approved for a credit limit increase. We’ve added an extra $2,000 to your credit line.”
What?! You think. I didn’t ask for my line to be increased. You may even be tempted to call your credit card company and get the increase revoked. Don’t! An increased credit limit can work to your advantage and help improve your credit score.
Your utilization ratio is one of the most important factors impacting your credit score.
But what is utilization?
Simply put, it’s the amount of money you spend in relation to your overall credit limit (not per card).
Let’s say you have three credit cards, which carry individual limits of $2,000, $1,500 and $3,000. In total, you have $6,500 in available credit. In order to have the strongest credit score possible, you should keep your utilization under 30% (under 20% is ideal). With $6,500 in available credit, you can spend $1,950 or less each month to keep your utilization at (or under) 30%.
FICO uses your utilization to determine 30% of your FICO credit score, which is a very significant chunk.
Why You Want that Credit Limit Increase
A credit limit increase automatically decreases your utilization, if you keep your spending habits the same.
If your $1,500 credit card suddenly increased by $2,000 you’d now have an available credit limit of $8,500 a month instead of $6,500. If you spent $1,700 on cards each month, your utilization would’ve just dropped from about 26% to 20% without any effort from you.
Why the Credit Card Company Offers Credit Limit Increases
The credit card company isn’t trying to do you a favor by increasing your credit limit. It’s trying to tempt you into spending more money. Credit limit increases typically come after you’ve displayed good financial behavior – like paying all your bills on time. The credit card company still wants you to be paying those bills on time (paying late crushes your credit score) – but it really wants you to only pay the minimum.
When you only pay the minimum amount due it means you’re paying interest on the remaining balance. This is how the credit card companies make money. You can be a savvy consumer by only purchasing what you can afford to pay off in full and never pay a penny in interest.
The Traps to Avoid
- Don’t miss a payment: being late can crush your credit score and result in you paying penalty APR, which could be up towards 29%.
- Pay your bills in full: paying the minimum just means owing money in interest
- Don’t be tempted into increasing your spending just because you have a higher limit
Who Should Avoid an Increased Credit Limit?
If you’re a compulsive shopper or struggling to handle existing credit card debt due to poor spending habits, you might want to reconsider having more available credit. The credit card company is trying to tempt you into spending more in the great hopes that you’ll start revolving on your credit and only paying the minimum due each month.
A raised credit limit can help your credit score, but if you don’t trust yourself to have access to more money, it’s good you know yourself. Shut it down and stick with a smaller credit limit.