Credit card limit increases seem to be all the rage these days. You could be doing online banking, withdrawing money from an ATM, or even getting your mail and there’s a good chance you’re going to be prompted about a credit limit increase.
It’s no surprise that financial institutions hope you accept a credit increase, since it means you’ll potentially spend more money. But a credit limit increase has the potential to help you manage your cash flow, which could be a good thing. Before you accept or decline the offer, be sure to consider the pros and cons.
The pros of accepting a credit limit increase
- More buying power
- Easier to manage your cash flow
- Increased credit utilization ratio
- Access to funds in case of an emergency
The most obvious reason for accepting a credit limit increase is to give yourself more buying power. Generally speaking, first-time credit card owners start with a low limit. The size of your limit may not have mattered early on, but as you charge more things to your credit card over time, having a higher limit comes in handy.
For example, if you’re booking a trip, you could easily spend a few thousand dollars on your card in a short period of time. With a low limit, you might not be able to put all of these charges on your card. Plus, many hotels require a credit card to confirm your reservation.
Accepting a credit increase may also increase your credit score
An increased credit limit also helps you manage your cash flow better. Since credit cards give you an interest-free grace period if you pay off the balance before the end of the month, you can manage your spending and income accordingly as long as you’re clearing the full balance when your statements come due. Alternatively, if you have a line of credit with a low interest rate, it could help fund home renovations or other expenses you’ve been holding off on.
Accepting a credit increase may also increase your credit score. Let’s say you have a credit limit of $5,000 and you usually carry a balance of $4,000. Even if you paid that amount off in full every month, your credit utilization ratio (how much credit you’ve used divided by how much credit you have available to you) would still be 80%, which is quite high. Now, if you accepted a credit increase of $5,000, you would have access to a total of $10,000 in credit, which would reduce your utilization ratio to 40%. That number is much more attractive to future lenders if you’re ever in the market for a mortgage or a loan.
You should never rely on a credit card to get you out of a financial emergency, but if you accept a credit limit increase on your line of credit or you decided to open up one at all, it can be reassuring to know you have access to cash at a reasonable interest rate if you really needed it.
The cons of accepting a credit limit increase
- You may spend more
- You could potentially rack up debt
- Your credit score might decrease
- Provides a false sense of security
Although the positives of accepting a credit increase sound pretty good, you could also put yourself in the hole if you’re not paying close attention. For some people, having access to more credit simply means they’ll spend more. You may not even be doing it intentionally but when you charge things to your credit card, you never see the money leave your wallet, which is why increasing the limit might be risky.
Despite the fact that many of the credit limit increase offers say you’re “pre-approved,” many lenders will still run what’s known as a “hard” check
Another thing to consider when accepting a credit limit increase is how you plan to spend those extra dollars. Funding your home renovations with credit, for instance, is a nice way to manage your cash flow, but only if you need to get them done. If you’re upgrading simply so that you can get access to more credit, all you’re doing is picking up debt. It doesn’t matter if the interest rate is low; you still owe money.
Despite the fact that many of the credit limit increase offers say you’re “pre-approved,” many lenders will still run what’s known as a “hard” check on you to ensure you’re creditworthy. This results in a drop of 10 points on your credit score. Although this isn’t a huge number, it could still affect you.
Finally, having extra funds available to you can create a false sense of security. Sure, you’ll have access to cash during a financial emergency, but that’s still borrowed money. When you think about it, you’re basically adding to your financial emergency if you need to rely on credit to get by.
How to get a credit limit increase
If you’ve decided that a credit limit increase is the right thing for you, then in most cases, all you have to do is just say yes the next time you’re prompted for one. You might be approved on the spot, which would give you access to your additional credit immediately, but in some cases, you might need to fill out some additional paperwork.
If you’re not offered a pre-approved credit card limit increase, you could always ask for one, too, by calling your credit card provider and letting them know that you’re looking for a limit increase. They’ll likely look at your account history, check your credit score and then decide on whether or not they want to grant you one.
Don’t forget that getting new credit is also technically considered a credit increase. For example, applying for another credit card or opening a line of credit. In cases like this, you might be required to fill out an application. Most of the time you’ll get an answer right away, but on occasion, it may take a few days or a follow up before you’re approved.
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About the author
Barry Choi is a personal finance and travel expert based in Toronto who makes frequent media appearances. His work has been featured in The Financial Post, The Globe and Mail, WestJet Magazine and more. You can check out Barry's personal website at moneywehave.com or you can find him on Twitter: @barrychoi