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Thinking of Increasing Your Credit Card Limit?February 12, 2016
It should come as no surprise that your credit scores are connected to your credit card limits. A good credit score gets you higher card limits. However, if you are indeed eligible for a higher limit, deciding whether to exercise this option is not a straightforward decision. Let’s look at the pros and cons of increasing the credit limit on your credit card.
Increasing your credit card limit helps lower the credit utilization ratio, which in turn helps improve your credit score. This is because your utilization ratio is one of the factors FICO takes into account in calculating your credit score.
Let’s assume you have a credit limit of $500 and you utilize around $250 per month. The ratio is 50%. Now if your credit limit is $750 and you utilize $250 per month, your credit utilization ratio reduces to 33.33%. It means you’re not using all of your available credit. This makes you appear to be somewhat more financially responsible to the credit bureaus, typically increasing your credit score.
Having a longer line of credit can help you during times of financial emergency. You can rely on your card if you have no better sources for borrowing. Also, if your credit score is higher, you will have a better chance of getting approved for personal loans. You’ll also have a better chance of getting a lower interest rate, since your credit score can affect whether you’ll be offered the best available rate or a higher, risk-adjusted rate.
With a higher credit limit, you can also earn more rewards points. If you never carry a credit card balance, paying for recurring expenses on your credit cards won’t cost you anything and can help you earn more rewards. Those rewards can actually reduce your spending in other areas by helping you pay for vacations, gifts, clothes and so on.
Your card can also help if you want to make a large purchase. It includes a number of consumer protections that can come to your rescue if there is a problem with your purchase. For example, MasterCard’s protections include extended warranties, price protection and coverage for damaged or stolen items. American Express offers similar benefits.
Increasing your credit limit may lead to more debt if you are not careful. If you spend more than you can afford, you will end up paying more interest on your balances. The best way is to work out a budget and spend accordingly. Not repaying on time can lead to late fees and potentially ding your credit score in the process.
Before deciding on a credit limit, the card company evaluates the applicant’s existing credit and may make some inquiries. Too many inquiries in a short time span causes a temporary drop in your credit score. Before requesting a higher credit limit, it is always worth finding out if the issuer intends to do an extensive credit score check.
While high limits on a card can help you get more money in times of need from one source, these also impact your ability to get credit elsewhere. Most lenders – including, for example, mortgage lenders – look at your credit card limits before deciding how much they are willing to loan you. A high limit may be interpreted as a sign of greater risk. A higher limit on your card may thus mean a smaller loan, or even a complete rejection of your application.
Bringing it all together
As with most financial decisions, you should weigh the costs against the rewards. If you have self-control and you don’t spend out of your budget, then there is little harm going for an increased limit of credit.
The decision to increase credit card limits may require some careful analysis and introspection. Call us and we’ll help you consider the pros and cons of raising your credit limits. Fund&Grow has established business relationships with industry-leading organizations that facilitate the use of the latest low interest money lending programs. Our team can easily help you get unsecured business credit at 0% interest, without proof of income, guaranteed! Call us to learn more today!