Credit Card Limit Increase! 3 Things You Should Know
Imagine a scenario where you are using your credit card for the past few months and now are contemplating an increase in your credit card limit. You could be facing a shortage of finances for everyday spending or need to make some big purchases. Now what you probably did right is keep track of your spending pattern. Not being a spendthrift and over shooting your credit card limit will allow you to stay away from falling into debt.
This is the maximum outstanding balance you can hold on your credit card at a given point in time without paying a penalty. If you over spend the credit limit, you will have to pay a penalty fee and continually doing so could lead you to debt and affect your credit score.
To check your credit limit, check your billing statement or call up your credit card company’s customer service. The credit card limit influences your debt to credit ratio. It is nothing but the total amount of credit limit compared to the total amount you spend out of that limit. For e.g. If your credit card limit is Rs.50,000, and the total amount that you have spent is Rs.45,000, then your credit utilization is high and as a result indicates a high debt to credit ratio. A high debt to credit ratio indicates a potential debt in the future.
The best time to apply for a credit limit increase would be when you get a raise. An increase in income will give you the confidence that you are capable of clearing the credit card bill. You might have to provide proof in the form of salary slips to support the increase in income. On time payment of credit card bills, a healthy credit score and no debt are indicators to the card issuer that you are more likely to make payments on time even with the increase in limit.
Still wondering if going for an increase in credit limit is worth it or not? You do need to ask yourself these questions before approaching the card company to increase the credit card limit.
Am I happy with my current credit limit?
Look at how your current credit card limit is working out for you with respect to your expenses, your savings and financial goals. If you feel it is not sufficient to meet your requirements, then it would make sense to opt for an increased credit limit. Keep in mind that excessive usage of your credit card month on month without paying the bills on time could lead to credit card debt. So look for a strong reason to go for a credit limit increase.
The credit card limit increase will again depend on your income, current debt lever and how promptly you make bill payments on time. In case you have a history of delayed payments, moved to a job with a lower income or already into quite a lot of debt then your application for a credit limit increase will be rejected. But the limit you want to increase to should be within your repaying capacity. Just because you need more funds to spend each month should not be a parameter.
What to Know About Asking for a Credit Card Limit Increase
In the right hands, an increased credit card limit can help improve your FICO credit score by reducing your credit utilization ratio, or credit balances divided by total available debt. In fact, 30% of your score is affected by credit utilization, so there is a case to be made for requesting an increase and not tapping the newly available funds.
But used the wrong way, a credit limit increase can fan the flames and lead to your racking up more debt.
In the previously recorded Facebook Live video below, Motley Fool analysts Michael Douglass and Nathan Hamilton answer a user-submitted question about credit limits and cover what you need to know.
Michael Douglass: Daniel asks: "What is the best time to request a credit increase, and does it hurt to request multiple ones at the same time?"
Nathan Hamilton: Best time -- that's essentially two questions. We'll hit upon both of them. Best time to request a credit increase -- I would ask first off: Why are you asking for the credit increase? I see two scenarios. If you are in debt, and you're asking for a credit increase to possibly charge more to the card and incur high interest charges, I would say there's probably no good time to ask for a credit increase. If his question is more related to FICO scores and how a credit increase could impact his utilization ratio.
Douglass: Let's break that down real quick. Utilization ratio is one of the two biggest things that is considered in your FICO credit score. You want a high credit score because you get better card offers, but you also can get lower mortgage rates, you can also get better auto rates. If Daniel is thinking about six months or a year from now buying a house, buying a car, something like that, then this is a really good time to be thinking about getting that credit increase so you can lower that utilization. Let's talk about utilization and what that is.
Hamilton: Utilization is simply just looking at your credit limits versus how much you're borrowing. If you have $100,000 available credit and you're only borrowing --
Douglass: Wow, that would be a lot.
Douglass: I don't know how much you make but --
Hamilton: If you're then borrowing only $10,000 of that, you have a 10% utilization ratio. Here's how it plays into the FICO scoring formula: The higher your utilization, the more you're borrowing, the more you're tapping your credit, the lower your credit score is going to be for that. So, FICO wants to see high-quality borrowers that don't take advantage of all the debt that they have at their disposal.
It's a savvy financial behavior. They reward you with a better FICO score. As you look at -- I know we're throwing a bunch of numbers here -- credit utilization as a whole, it impacts 30% of your FICO score. Short of payment history, which accounts for 35%, there's no bigger factor out there, so you've got payment history, credit utilization.
And I would say if you are good -- getting back to his question -- if you are good at managing your finances, if you're paying off your bills monthly, the best time to request a credit increase is whenever you can. Because if you're going to increase your available credit and you're not borrowing more, if you're not increasing your utilization ratio, if you're still carrying the same amount of debt, your credit score is going to improve over time.
Here's a good thing to add on that as well. It is easy to request a credit increase with your card issuer. Many times -- I actually did this a few weeks ago -- I just had to answer two to three questions online with my card issuer, and input the number for what I would like my total available credit limit to be.
A decision was delivered instantly, and at that point you can see where my FICO score could improve over the future just for that simple action. I'm not borrowing more money. I'm not using that credit limit. I'm just requesting an increase to improve my utilization ratio which is actually near zero anyways since I don't really borrow on credit card debt. It just improves your FICO score if you're managing well.
Douglass: I was actually lucky. My credit union actually just gave me a couple of increases.
Douglass: I didn't ask. They were just like, "Hey, we're willing to lend you more money." That's good to know. I wasn't using it, but it was very nice. As I became more aware of credit scores and such, it was like this is actually something they're doing to help me, so I appreciate that.
Hamilton: There's two sides of it. They're helping you with utilization, but they're also offering --
Hamilton: To some people to incur interest charges, so I understand where both people are coming from.
Michael Douglass has no position in any stocks mentioned. Nathan Hamilton owns shares of, and The Motley Fool owns shares of and recommends, Facebook. The Motley Fool has a disclosure policy.
Will asking for an increase in your credit limit affect your FICO score?
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If you can demonstrate that you have successfully gotten two or three unsecured credit cards, and have been able to keep them a few years that is considered good credit. Also, if you have a high limit but 30% or less balance owed, that is the strongest for FICO purposes.
Because FICO score incorporates averages, if you have more than 20-30000 of credit limit or more that might be seen as "higher" than average. 2 or 3 cards with low balance owed and about 20-30K balance is probably best.
If the requested increase is more than 10%, the lender will probably request a copy of the customer's credit report from 1 or all 3 bureaus. This will cause an "Inquiry" to by added to the credit report and the FICO scoring system subtracts points from the score for these inquiries. Once the increase is granted, it may increase the score if it is not used (lowers credit utilization ratio).
- Are low credit limits making your debt to available credit ration seem higher than it should be?