The next time your credit card company comes up with an unconditional credit limit increase, go ahead and say yes. Why? Because it is one of the fastest and easiest ways to improve your credit score. You just have to make sure you don’t actually use increased credit limit simply because it exists.
Increasing Your Credit Limit Can Improve Your Credit Score
The FICO credit scoring model (one of the most commonly used models in the industry) bases 30 percent of your credit score on something called “use of credit. “This term refers to the amount of credit you are currently using versus the amount of credit you currently have. As a general rule, you want to keep your credit usage below 30% of your total credit limit, as this will start. to negatively affect your credit score.
For example, if you have a credit card with a credit limit of $ 3,000 and an outstanding balance of $ 1,500, you are using 50% of your available credit. If your credit limit increases to $ 6,000, your $ 1,500 balance becomes 25% of your available credit, which would almost certainly increase your credit score. The advantage of a good credit score is that you won’t be turned down for so many loans, and you will also benefit from better interest rates. In addition, as credit expert Matt Schulz points out, CNBC:
“If you’re about to max out your credit cards, increasing your credit limit can give you some financial wiggle room in an emergency. “
Be careful though
It is important to note that this only works if you ignore your new credit limit. If you’re already struggling to overspend, you might want to reconsider accepting a raise. Raising your credit score is one thing; getting into debt that you cannot repay is another.
Also as Balance emphasizes, you don’t necessarily want to accept credit limit offers that come with verbiage that says you must “be approved” or “be eligible” as this could suggest that you apply for more credit from your lender. This could result in a “Hard shot“on your credit, which will temporarily lower your credit score by approximately 5 to 10 points, if only for a few months. An unsolicited offer to increase your lender’s credit limit should be a clear offer, no approval required – and when in doubt, be sure to ask your lender.
At the end of the line
Accepting an increase in your credit limit will likely improve your credit score. If the lender hasn’t offered to increase it, you can also request one. In this case, you can temporarily hurt your score for a few months, but the effect will be minimal as improving your credit usage will have a bigger impact on your score in the long run. Remember to time the application so that you do not apply for a large loan for at least a few months after applying.
This story was originally posted on January 10, 2020 and has been updated on April 16, 2021 with additional information.
