What are the Pros and Cons of Increasing Your Credit Limit?
Should you increase your credit limit? The answer is… it depends. Fortunately, if you’re reading this, you’re already making a good choice by doing research before making a financial decision. Increasing your credit limit could be good or bad, but it ultimately depends on your goals and individual circumstances. Here, we’ll walk you through everything you should know before increasing your credit limit so you can make a decision with confidence!
To put it as simply as possible, your credit limit is the maximum amount you can spend on a credit card or overdraft account. Of course, your credit limit is a limit; you shouldn’t spend anywhere near it in any given payment period.
Your credit utilisation ratio refers to the amount of your available credit that you’ve used at any given point. A good credit utilisation ratio is below 25%. Many resources online will say 30% is a good credit utilisation ratio, but in reality the lower you can get it, the better.
How Is My Credit Limit Calculated?
Your credit limit is determined by a variety of factors that your credit provider will assess after you apply for a credit card or arranged overdraft account. Some of the things they’ll be looking at include:
- Your payment history
- Your current credit limit on any existing credit lines
- Your monthly income
- Your existing debts
If you’re approved, they’ll give you a credit limit that they think you can handle based on those factors.
Increasing your credit limit can have a number of benefits. Some of the most noteworthy include the following:
- Increasing Your Credit Limit Can Lower Your Credit Utilisation Ratio: If you increase your credit limit but don’t increase your spending, your credit utilisation ratio will drop, which can have a positive effect on your credit score.
- A Higher Credit Limit Can be Useful in Emergencies: While a credit card or overdraft should never be your financial backup plan, having a higher credit limit can be useful in rare situations when you need to make a large payment quickly.
- You Can Make Larger Purchases on Your Credit Card: When you have an increased credit limit, you may be able to make large purchases on a credit card. This can be beneficial because credit card purchases are protected under Section 75 of the Consumer Credit Act. If there’s an issue with your purchase, you’ll most likely be able to receive a refund. Keep in mind that you don’t want to exceed 25% of your credit limit.
- You Can Improve Your Credit Without Adding New Debt: Increasing your credit limit accomplishes some of the same things that opening a new credit card does. However, opening a new card can potentially disrupt your credit history and lower your credit score. While increasing your credit limit sometimes requires a hard credit check, your credit score will typically recover within a couple months.
- It Could Impact Your Ability to Get a Loan: If you have a lot of available credit, lenders could view that as a risk, as you could potentially stretch your finances too thin. As a result, a higher credit limit may impact whether you qualify for larger pieces of financing like a personal loan or mortgage.
- It Could Lead to More Debt: Many of the benefits that come from increasing your credit limit only work if you don’t increase your spending. But if you haven’t established healthy spending and payment habits, increasing your credit limit could be a recipe for disaster.
- Increasing Your Credit Limit Can Send the Wrong Signals to Lenders: If you request an increased credit limit too early or too often, lenders might interpret it as a sign that you’re dependent on credit. This could impact your ability to get other credit products in the future.
One of the most important things to ask yourself before increasing your credit limit is ‘why?’ Getting clear about why you’re increasing your credit limit can help you determine whether you should actually increase your credit limit.
If you’re trying to improve your credit score, it may be a good idea, but if you simply want to access more funds, you might want to reconsider requesting an increase.
Secondly, you’ll want to make an objective assessment about whether you are prepared to increase your credit limit without hurting yourself. If you regularly pay your credit card or overdraft on time and in full, and stay below 25% or your credit limit, you can confidently request an increase. But if you regularly spend 30% or more of your credit limit, you may want to focus on controlling your spending before increasing your credit limit.
How Can I Increase My Credit Limit?
If you want to increase your credit limit, you’ll want to make sure that you do the following:
- Make timely payments
- Pay your balance in full
- Utilise less than 25% of your existing credit limit
- Keep your other credit lines in good standing
If you’re following those general guidelines and your account is in good shape, there are two main ways you can increase your credit limit:
Requested Credit Limit Increases
The most common way to increase your credit limit is to request an increase. You can do this online with your credit card provider. When you request a credit limit increase, your credit card provider will probably ask you for some of the same information you provided when you first applied for the card, such as your income, address, and whether you’re employed.
You also may need to request how much you want to increase your credit limit by. Asking for too large an increase can send the wrong signal, so ask for an increase between 10-25% of your current limit for the best chance of being approved for the increase.
Automatic Credit Limit Increases
Some credit card providers will automatically increase your credit limit every 6-12 months if your account is in good standing. If your credit card company does this, you don’t have to take any action when your credit limit is increased. They’ll typically let you know prior to increasing your limit, and you can stop them from increasing your limit if you want to keep it where it is.
Learning new information can lead to more questions. Lucky for you, we’ve answered some additional common questions about raising your credit limit here!
What if I Don’t Want a Credit Limit Increase?
There’s nothing wrong with maintaining your current credit limit, assuming you’re comfortably staying within 25% of it. If you’re planning to apply for a loan in the near future or simply don’t want the opportunity to overspend, keeping your credit limit where it is could even be more beneficial than increasing your credit limit.
Always remember that what’s good for someone else’s credit might not be the best for you!
Should I Ever Decrease My Credit Limit?
Decreasing your credit limit may be a strategy worth considering if you are trying to build better payment habits. With a lower credit limit, you’ll need to pay off your balance more consistently.
Keep in mind that while this can help you build healthy financial habits, it could backfire and damage your credit score if you end up missing payments or going over your credit limit.
What Happens if I Go Over My Credit Limit?
If you go over your credit limit, your credit score will be negatively impacted and it will be recorded on your credit report. This could make it difficult to get loans, credit cards, and other types of credit in the future. If you go over your credit limit, you could face fees and penalties, an increased interest rate, and be unable to make payments with your credit card or overdraft.
Credit card companies will often lower your credit limit if you go over it, and banks may revoke your arranged overdraft privileges if you exceed your credit limit. You also risk having your account closed entirely. This is especially risky with overdrafts, as many overdraft contracts state that the bank can require you to repay the balance at any time.
Build Your Credit With the Pave App
Increasing your credit limit is a great way to improve your credit score by lowering your credit utilisation ratio. And while increasing your credit limit can be beneficial, it’s not the best choice for everyone. What increases one person’s credit score might have the opposite effect for someone else, and understanding those differences is vital for building a healthy credit score.
Understanding what’s best for your financial situation and your credit score isn’t always easy. That’s why we made the Pave app. Pave helps you understand the factors influencing your credit score, makes personalised recommendations based on your finances, and helps you keep track of your payments to build a good payment history.
If you’re considering increasing your credit score, or need to increase your score before requesting an increase, Pave might be able to help you. To see why over 300,000 Brits have downloaded Pave, head over to the App Store or Google Play today!