Credit cards are some of the easiest ways to build your credit history and have discounts on some of your purchases. Each credit card comes with its own credit limit which is the maximum credit line extended to you by your credit card issuer. As you use your credit card, your credit limit can be increased based on your performance with the card and other financial situations such as income increase, lowering your debts, etc. Learn when it is the best time to ask for a credit limit increase on your credit accounts.
Having a higher credit limit gives you an extra financial cushion. Not only that you can afford to buy a lot of things and use your limit instead of taking on personal loans, but a higher credit limit can also help you boost the health of your credit. This article will walk you through details on when you should consider applying for a credit limit increase on your credit card.
A credit limit increase can be risky for the card issuer and the credit card user
An increase in your credit limit means that your credit card issuer is extending more credit lines to you and taking on extra risks. For this reason, you are more likely to be approved for a credit limit increase if you have a good credit score, you don’t carry too much debt, your income went higher, and/or you have been using your current credit card for a while and responsibly.
Higher credit limits also come with responsibilities. Without using your credit card wisely or applying for a credit limit increase for the right reason, you could see yourself in more financial trouble than before. Many people tend to shop more due to their credit card limit increase which leads to carrying more balances on their credit cards and getting into credit card debts later on. In addition, if you are not eligible for the limit increase, you might end up with a hard inquiry on your credit report and a denial of your application. This is why it is a good idea to ask for a credit limit increase only when you need it and at the right time.
What is a credit limit?
The credit limit is the total line of credit the lender extended to you on your revolving credit account. In order words, your credit limit is the maximum amount you are allowed to spend on an account such as a credit card account. Once this limit has been reached, you must pay off some of your balances before you can use your account. The amount you spend on your account compared to your available credit limit becomes your credit utilization.
For example, if you have a cash-back credit card with a $1,500 credit limit, you can spend up to $1,500. Once the total limit ($1,500 in this case) has been spent, you cannot use your credit card unless you pay off some of that balance. Credit card issuers require you to pay a minimum payment due every month when you have a balance on your credit account.
After using your credit account for a while, you can ask for a credit limit increase. Your card issuer will evaluate your application and approve or deny you based on your credit profile. Knowing when to request a credit limit increase, however, can be challenging and you can easily get denied credit if you are not qualified. Furthermore, you don’t need to ask for a credit limit increase just because you can.
This article will walk you through the best time to ask for a credit limit increase to ensure your approval rate and for the right reason. Without further ado, let’s get started.
1. Have a good credit score
Credit cards and other forms of revolving credits are loans, and therefore, lenders need to evaluate your eligibility before you get approved for a limit increase. Your credit score is used to evaluate your creditworthiness. Since all credit account activities are reported to major credit reporting bureaus and your credit score is calculated using information pulled from your credit reports; having a good credit score indicates that you act responsibly when it comes to credit accounts. That is you pay your bills on time, you have a lower credit utilization, and you do not engage in excessive borrowing, etc.
So, when is the best time to ask for a credit limit increase? Credit card issuers pay attention to your credit score when evaluating your application. A credit limit increase means that the card issuer is extending extra credit to you. How you used the limit you have been approved for already, will determine your approval rate and how much. Before you request for credit limit increase, make sure that you have a good credit score. A good credit score reflects excellent use of your current credit card and increases your chances of getting a higher credit limit.
You might also like: How your credit score affects your life and the future of your finances?
2. The account you are asking credit limit increase for has been open for at least six months
Before you ask for a credit limit increase, make sure that you have built enough credit age. Your credit history is an important factor credit card issuers consider before they approve you for more credit. How long you have been using your credit card and your behaviors help lenders to estimate the risk involved in lending you money.
The longer your credit age is, the better. Although you don’t need to have many years to qualify for a credit limit increase, you definitely need to have owned that credit card for at least six months to a year. Responsible use of the credit limit you have been approved for on the card shows your credit card issuer that you can manage a higher credit limit. The longer the age of your credit, the easier and faster you will qualify for a credit limit increase.
3. Your past account activities align with your card issuer’s terms of use
How long you have been using your credit card is important. But, what is more, important is how you used your credit card in that time period. If you violated the terms of your credit cards, your card issuer will be reluctant to approve you for a credit limit increase. For example, if your credit utilization rate on the card is on the roof, the lender might not approve your credit limit increase application. Although you are allowed to spend 100% of your credit limit on the card, it is never recommended to use all your credit limit. The risks of credit card debts increase as you spend more on your credit cards.
This is because a higher utilization rate shows that you are relying on debt to cover your expenses. A higher utilization rate lowers your credit score and makes you a risky borrower. Spending too much of your credit limit increases your account balances and leads to credit card debts down the road. For this reason, it is not a good idea to ask for a credit limit increase when you have a higher credit utilization ratio. It is recommended to keep your credit utilization under 30%. The lower your utilization rate, the better.
Related: What is the best credit utilization ratio?
4. You don’t have negative items on your credit reports
If you have owned a credit card for a while, you probably know that there is a combination of factors that affect your credit score. For example, your payment history is the biggest factor that affects your credit score(35% of your FICO score and 40% of your VantageScore, etc). So, having a late payment on your credit report will negatively affect your credit score.
Beyond a late payment, however, lies even more negative items. For example, a late payment can lead to foreclosure, bankruptcy, accounts in collection, charge-offs, and many more. All these activities are considered negative items. Some lenders will deny you credit if you have some of these negative items on your credit reports.
Asking for a credit limit increase is like applying for more loans. If you have not been using your current credit accounts responsibly, there is no indication that you can manage more credit. It is all about risk assessment. That is how lenders stay in business. You are more likely to qualify for a credit limit increase when you have a clean credit report and good credit history.
Related: How to remove late payments from your credit report
5. You are expecting a large purchase
One of the best times to ask for a credit limit increase is when you are expecting a large purchase. A good example is when you are planning to renovate your house but don’t have all the cash needed. Instead of applying for a brand-new loan, you can ask for a credit increase. Once approved, you will get the money you need but the process will be simple and straightforward compared to applying for a house renovation loan. Having a fast process does not mean you are getting a good deal. Credit cards come with higher APRs. If a personal loan comes with a much lower APR and flexible terms, consider taking out another loan before using your credit card on a large expense such as a house renovation.
A large purchase on your credit card will automatically increase your credit utilization which can lead to credit card debt. This is one of the biggest mistakes many people make on their credit cards. They get higher limits, make expensive purchases using their higher limits, and fail to pay them off. Unless you have a plan on how to pay it off, you might find yourself fighting to cover high compound interest rates, fees, and charges in the form of an annual percentage rate(APR) that is applied to your credit cards.
Another big mistake people make on their credit cards is to apply for credit limit increases they don’t need. They just want higher limits. As a result, they buy more clothes, and expensive electronics, eat out every day, etc. Higher credit limit comes with responsibilities and spending temptations. You need to have a plan and a meaningful reason to ask for a credit limit increase. Otherwise, you will end up in consumer debt and destroy your finances.
Related: How to avoid overspending on a credit card?
6. Your DTI ratio is good
Your debt-to-income ratio is a major representation of the amount of debt you have compared to your income. A higher ratio indicates that you have accumulated too much debt already. As a result, you cannot afford to take on more debt on the same income. Every debt comes with an interest rate, fees, and charges. So, unless you increase your income or improve your DTI ratio, you will find it difficult to qualify for more credit.
If you have too much debt, focus on improving your DTI ratio first before you apply for a credit limit increase. You can easily improve your ratio by aggressively paying off some or all of your debts. Another trick you can use is to increase your income. You can also lower your debts and increase your income at the same time which is a strategy that works effectively well when improving your DTI ratio.
7. Your income has gone up
One of the best times to apply for a credit limit increase is when your income went higher. For example, if you had a student credit card during college, your credit limit was much lower compared to normal credit cards due to a lower income. A higher-paying job after graduation can automatically boost your income which in turn qualifies you for an increase in your credit limit.
If your income went higher, make sure that those changes are reflected in your account. Most credit card issuers allow you to make updates to your account online. You can also call your credit card issuer for updates and credit limit increases.
8. You want to increase your credit score
When it comes to boosting your credit score, any tips you get your hands on will be valuable. One of the best techniques to increase your credit score is to lower your credit utilization by increasing your credit limit.
For example, if you have a total credit limit of $2,500 with a credit utilization of 50%, your new utilization will become 31% after securing a $1,500 credit limit. That is your new credit limit is $4,000 but you only spent $1,250. This means that your credit utilization ratio went from 50% to 31%. As a result, you should see an increase in your credit score.
How to ask for a credit limit increase
The process of increasing your credit limit is simple and straightforward. Since you are already using the card, you will not need to go through a gruesome risk assessment process. You will need to submit your application/request and wait for the results. The following are ways you can use to apply for a credit limit increase.
- Request a credit limit increase inside your account online. This is probably the simplest way to ask for a credit limit increase. If you have an online account, your credit card issuer should have an option where you request more credit limits. A few clicks and you are done. Make sure that all your information is current and that your income has been updated in your account.
- Call your credit card issuer. You can call your credit card issuer and ask for a limit increase
- Sent in your application by mail. This process takes longer but it is still effective. Some lenders such as banks have options where you can request a credit limit increase by mail. Make sure that you follow the guidelines and proper processes required for this process.
- Do nothing. Most credit card issuers automatically increase your credit limit without a request. As you use your credit cards, the card issuer will evaluate your performance and other financial activities. If you are a responsible credit card user and your income can support the extra credit limit, the card issuer will increase your credit limit automatically. The only thing you have to do is to update your account information all the time.
Read more: How to increase credit limit? Credit line increase
Does requesting a credit limit increase lower my credit score?
Some credit card issuers request to see your credit profile when you ask for more credit. This activity results in a hard pull/hard inquiry on your credit reports. Hard inquiries lower your credit score by a few points and they stay on your credit reports for 2 years. However, hard inquiries do not affect your score after 12 months.
Other credit card issuers increase your credit limit without pulling your reports which does not affect your credit score. If you are a trustworthy borrower, have a good income, have been using the card for a while, and do not have a lot of debt, you will easily be approved for more credit.
