A credit limit is the maximum amount of money you can borrow on your credit card. It is an essential factor in determining your credit score because it’s used to calculate your credit utilization ratio.
The card carrier determines your initial credit limit, but they may offer you a higher credit limit or automatically increase your limit over time.
A credit limit increase isn’t necessarily a bad thing for your credit. In fact, it may even cause your score to go up.
How a Credit Limit is Determined
Because a credit limit is the maximum amount you can borrow on a credit card, it will ultimately be determined by the credit card company issuing the card.
Credit card companies will assess your credit limit based on several factors.
One of the first things a credit card company will look at when determining your credit limit is your payment history. Your payment history plays a massive role in your credit score because it indicates whether or not you can responsibly pay your expenses, such as rent or car payments. A positive payment history will show lenders that you are capable of having a higher limit.
Number of Accounts Open & How Much You Owe
Another factor that affects your credit limit is the number of accounts you have open and how much you owe on each account. If you have several lines of credit but owe very little on each account, this will look more favorable to creditors than if you have one or two but owe a lot on each.
Finally, your income will play an essential role in determining your creditworthiness. Credit card issuers want to make sure that you can afford monthly payments, so they’re unlikely to extend a high line of credit to someone with a lower income, such as a student. Cardholders with higher incomes are more likely to receive high credit limits on new credit cards.
How Your Credit Limit Affects Your Overall Credit Score
Your credit limit itself doesn’t have an impact on your credit score, but the way you use it will.
The three major credit bureaus – Equifax, Experian, and TransUnion – review several factors in their credit scoring models.
Credit Utilization Rate
One of these factors is known as a credit utilization rate.
Your credit utilization ratio is the percentage of credit you’re using compared to your overall credit limit across all your accounts. This ratio is calculated by dividing the total amount of credit you owe by the total credit that you have available to you.
For example, if you have a credit card balance of $100 on a $1,000 credit limit, your credit utilization ratio would be 10%.
When it comes to credit limits, a credit card limit increase will mean that your overall credit utilization ratio will drop. This assumes, however, that your overall spending habits remain the same after your credit limit goes up.
Many people fall into the trap of spending too much after they receive an increased credit limit. This will cause your credit utilization to jump and can cause problems if you spend more that you’re able to pay back.
How To Become Eligible for a Credit Limit Increase
Whether you’re ready for a little more room in your budget or want to improve your credit, a credit limit increase can be a positive step for your personal finances.
Here are some things to do to make qualifying for a credit limit increase more likely:
- Make on-time payments: Paying your credit card bill on time is one of the best ways to improve your credit score and prove to your credit card issuer that you can use your line of credit responsibly.
- Keep your personal and financial information current: One of the biggest signals to a credit card company that it’s time to increase your credit limit is getting a raise. Keeping your information up-to-date can trigger a credit limit increase.
- Pay more than the minimum amount on your balance: Paying off your credit card balance in full each month is a great way to prove that you have responsible credit card habits and avoid racking up interest rate charges.
- Monitor your credit: Keeping tabs on your FICO score and regularly checking your credit report can help you catch any fraud or track any hard inquiries. You can get a free online copy of your credit report from VantageScore each week without negatively impacting your credit score.
When to Ask for a Credit Limit Increase
It doesn’t matter if you have an American Express, Capital One, or Discover card. Sometimes, a credit card company will feel more comfortable obliging a credit limit increase request, and there are times when they won’t feel good about offering you a higher amount of credit.
Understanding the right timing will play heavily into your chances of securing a higher credit limit.
Good times to ask for an increase
- When you get a raise: If you recently got a raise or a higher-paying job, your chances of qualifying for more credit improve dramatically. Your credit card company sees higher income as a sign of financial security, which means they’re more likely to extend a higher credit limit.
- When you are a good customer: Credit card issuers are more likely to treat their best customers well. If you have been a loyal and reliable customer for years, your credit card company is more likely to oblige a request for a credit line increase.
- When you have a good or excellent credit score: Naturally, good credit history is a significant factor in determining whether you can handle additional credit. If your credit score is in a good place, you likely won’t have a problem securing more available credit.
Not-so-good times to ask for an increase
- When you take a lower-paying job: If you recently took a lower-paying job or were laid off, you should hold off on asking for a credit limit increase. Wait until you have a higher-paying position or when your employment status changes.
- When you have recently applied for a loan or credit limit increase: Asking for a credit limit increase requires a hard pull, which means your credit card company will be able to see all recent credit inquiries. Having too many recent hard credit inquiries can signal that you are being reckless with your credit. Wait until your score has recovered from recent credit checks before requesting more credit.
- When your credit score is poor: It goes without saying that having poor credit will not play well in your favor. Before asking for more credit, work on building good credit habits so that you can handle having access to more credit in the future.
How to Request a Credit Limit Increase
Contact your credit card company
If you believe you’re ready for additional credit on your card, you can contact your credit card company directly to request an increase. Depending on your issuer, you can submit your request online or call the number on the back of your credit card.
When you request a credit limit increase, your credit card company will go through an approval process to make sure you’re a good candidate for more credit. This will include a hard pull of your credit report and verification of your personal information, such as your employment status, income, monthly expenses, and more. Your credit card issuer will determine whether you’re ready for more credit based on their findings.
Wait for an automatic credit limit increase
More often than not, people don’t need to ask their credit card issuer for more credit. Credit card companies often provide higher credit limits to customers who continuously make on-time and in-full payments on their credit cards over a period of time, usually six months to one year.
If your company gives you a credit increase you don’t want, you can contact them to see if they can reverse the move. You should only consider reversing a credit limit increase if you believe that having access to available credit will be too tempting for your spending habits.
Ultimately, requesting a credit limit increase could impact your credit score, but it all depends on a few factors.
A credit limit increase will result in a hard credit inquiry, which can cause your credit score to drop in the short term. But having a high credit limit can improve your credit utilization ratio, which will boost your score for the long term.
If you’re considering requesting a credit limit increase, weigh the potential benefits and drawbacks before making a final decision. As long as you keep your spending habits in check, having more additional credit can be a good move for your credit score.