Credit limit increases are not given by credit card companies lightly. They are a deliberate decision made based on a history of making your payments on time. If a company feels a credit increase would hinder your ability to make payments, they won’t give it to you. If you have recently been notified that the limit on one of your cards has increased, you should look at that as a positive reflection of your responsible financial habits. Congratulations!
The Benefits of a Credit Limit Increase
One of the most important factors in calculating your credit score is your credit utilization ratio, or the comparison between the credit you have used versus the credit available to you. The more credit you have available, the more responsible you appear with regards to your finances, and the healthier your credit score will be. Assuming you do not accumulate any additional debt, an increase in your credit limit will only help you.
According to FICO, individuals with scores above 750 typically use only 7 percent of the credit available to them. If that seems unrealistic to you, a healthy goal is to keep your percentage between 20 and 30 percent. When the time comes to apply for a mortgage or car loan, you will appreciate what an increased, underutilized limit will do for your interest rate.
The Drawbacks of a Higher Limit
On paper, there are no negative repercussions associated with a credit limit increase, but that doesn’t mean they don’t exist. Instead, credit limit drawbacks are much more psychological in nature – and that makes them dangerous.
As previously mentioned, credit increases come with an implicit trust from the credit card company that you can handle the additional responsibility. If you know you can’t – and you’re likely to rack up debt extremely quickly – there’s no shame in calling them and requesting it be lowered back down.
Take a long look in the mirror and objectively analyze your spending habits, especially your habits following a raise, inheritance, or other sudden and unexpected windfall. Did you use that money wisely? If the answer is no, it’s better to lower your credit limit and raise your score via other means (such as reducing current debt) than deal with the consequences of uninhibited spending.