What does it mean when you receive a increase your credit limit? First, let’s quickly define what a credit limit is and the best practices for using credit.
A credit limit is the maximum debt position a creditor allows you to assume on a revolving credit facility, such as a credit card or line of credit, said Thomas J. Brock, CFA, CPA and contributor expert at Annuity.org.
A credit limit is also a key aspect of your personal credit score. How you use this limit has a bigger impact than you might think. “The extent to which you use your credit limit can have a serious impact on your rating,” Brock said. “It is estimated to represent 30% of your credit score.”
The best approach when your credit limit increases is to consistently use less than a third of your credit. Credit users who do so are considered fiscally prudent. Those who use a higher proportion, on the other hand, are considered overstretched and less creditworthy.
Whether it’s keeping your spending habits down or figuring out if you might qualify for a lower interest rate, follow these best money moves when your credit limit increases.
Don’t increase spending
What’s one of the best money moves you can make when your credit limit goes up? Don’t use the raise as an excuse to start spending more money.
If you don’t change your spending habits, Brock says that over time, you will benefit from the positive impact the increased limit will have on your credit score.
Not spending is also good news for your credit score. Marcus P. Miller, CFP and Financial Advisor at main capitalstated that an increased credit limit with a stable or decreasing balance will ultimately help your credit score.
“If you already have credit card debt, increasing the line of credit will lower your utilization rate,” said Lauren Anastasio, director of financial counseling and CFP at Stash. “If you have no credit card debt, you just have the peace of mind that credit is available if you need it, but your limit increase doesn’t require any action on your part.”
Earn more rewards with recurring payments
If you decide to spend, there are a few spending approaches to consider when your credit limit increases.
One approach is to pay for large purchases using your credit card. Abhinov Balagoni, CEO of Pax Credita Techstars company, said it can help you rack up rewards from your purchases.
Some credit card purchases also have consumer protections.
“A few variations of Visa and Mastercard credit cards offer perks, including extended device warranties, price protection for months, and coverage for damaged or stolen items,” Balagoni said. “The bigger the purchase, the bigger the savings.”
The other approach to earning rewards, if you’d rather not make a big purchase, is to make recurring payments on a credit card. Consider recurring daily expenses like paying your smartphone bill. Balagoni said making recurring payments with your credit card will help you earn more rewards. These rewards will reduce your lifestyle expenses and help pay for travel, accommodation, and restaurant meals.
Consider removing other credit cards from your report
If you have old secured credit cards that you haven’t used in years, you may want to consider deleting other credit cards that are no longer used from your report.
Miller uses the example of an old secured credit card. You haven’t used this card for years. It has no benefits, but it charges an annual fee. Miller said you can call the credit card company and close the account.
“Make sure you don’t cut your only established line of credit, as this could hurt your overall score,” Miller said. One of the main “don’ts” when your credit limit increases is to eliminate other lines of credit. This is especially true for long-established lines of credit.
Remember that credit scores reflect individual and aggregate credit line information. Exercise caution in which credit card you choose to remove. Deleting too many credit cards too quickly can negatively impact your credit score.
Find out if you qualify for lower interest rates
Adrienne Taylor-Wells, Certified Financial Advisor at Tailor-made WealthSaver, says to call the credit card companies and see if you qualify for a lower interest rate. You may be eligible to receive it.
“If your rate is already low or you’re approved for a lower interest rate, leverage the increased credit for something that will help you build wealth,” Taylor-Wells said. (Keep reading to learn more about how to leverage debt the smart way.)
Check your credit score
Gary Grewal, CFP and author of “Five Financierssaid now is a good time to check your credit score. Your score should go up!
Consider using this as a chance to request higher limits on other credit cards. Grewal said you can also inquire about lower annual interest rates or options to refinance your home or car, if needed, to save on interest charges.
Do not, however, ask for an additional increase in the line of credit that has just received an increase. Asking for another increase can lead to a “hard pull” on your credit profile and a downgrade in your credit score.
Leverage debt the smart way
Grewal said a credit limit increase is a good opportunity to do something with that money in a smart way. Grewal uses the example of paying off any high-interest debt. Paying down debt, along with reducing credit usage, will help boost your credit score.
Peter Casciotta, owner of Asset management and advisory servicessaid it was a smart money move to take advantage of an increase in your credit limit.
“When a good opportunity arises, it provides you with the resources to participate where you may not have had the resources to participate before,” Casciotta said.
Although you can decide not to use leverage or borrow against increasing credit, and that’s fine too.
“The peace of mind of knowing you have ‘quick access’ to emergency funds is immensely valuable,” Casciotta said.
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