Used strategically, a credit limit increase can be good for your bottom line.
Occasionally, you may receive a letter from your credit card business. He may say something like, “Congratulations! Because you’re a great customer, we’re increasing your credit limit! Or it can say, “Congratulations! You may qualify for a credit limit increase. To accept our offer, contact us at XXX-XXX-XXXX.”
Like marriage proposals from two very different characters, you should jump on one of these offers and think long and hard about the other. Here, we’ll discuss both types of letters and help you determine when it’s wise to accept the big deal.
“We are increasing your credit limit”
If your credit card company says “we’re increasing your credit limit,” that means they’ve already decided they want you to have a higher credit limit. This can be due to several reasons:
- You are a great customer and the company trusts you to use the credit increase and pay it back as promised.
- The company is concerned that you are not interested and wants to keep you as a customer.
Either way, he wants you – he really wants you. If you’re viewing your account online and the new credit limit has already been applied, you don’t need to do anything else.
“You may be eligible”
The word “may” tells the whole story. While acting like you won the pig calling contest at the county fair, it promises you nothing.
What is likely to happen is that your credit card company will initiate a firm credit check to make sure you are good for the upper limit. This credit check may have no impact on your credit score, or it may lower your overall score by a few points.
Let’s say you tell the credit card company to go, they do a credit check, and your credit score drops five points. Five points isn’t a lot, and as long as you make all your payments on time, it won’t take long for your score to rebound.
Yet imagine that your car is almost dead and you have to buy a new one. To qualify for the lowest possible interest rate, your preferred lender wants you to have a credit score of 740. Your score just dropped to 735, which is quite respectable, but not high enough to get the rate. interest you want.
If you receive a notification that you “may” be eligible for a credit limit increase, call the credit card company to find out what they plan to base their decision on. If they want to see a copy of your latest W2 or other type of income verification, that’s easy. If he’s considering doing a credit check, make sure your credit score can withstand a slight drop.
If you can safely move forward without damaging your credit score, here are some compelling reasons to go for the raise.
Improves your credit score
One factor that goes into determining your credit score is called the “credit utilization rateThis ratio determines 30% of your FICO® score. Here’s how it works:
Let’s say you have four credit cards, each with a credit limit of $2,500. This means you have $10,000 in total available credit. If you owe $5,000 on these credit cards, you have a utilization rate of 50% ($5,000 ÷ $10,000 = 0.50).
Now imagine that one of those credit cards automatically increases your credit limit to $6,000. This means you have $13,500 in total available credit instead of $10,000. With this credit limit increase, your credit utilization ratio drops to 37% ($5,000 ÷ $13,500 = 0.37).
The lower the utilization rate, the better. Thus, a utilization rate of 40% is better than 50%; 30% is better than 40%, etc. A credit ratio of 30% or less is generally considered good.
Provides emergency relief funds
A emergency fund can give you peace of mind. If things go wrong and you have a costly problem, a higher credit limit means you have the ability to charge any part you don’t have enough money to cover.
More reward points
No matter how many credit cards the average person has, many of us have a favorite. For example, one person may want airline miles while another may prefer cash back. If your favorite credit card offers a limit increase, it gives you more options to use the card for day-to-day expenses, pay it off in full each month, and maximize your credit card rewards.
when to say no
If you’re in the habit of pulling out a credit card every time you see something you want, or you have to borrow from one card to pay for another, a limit increase might not be in your best interest. If you wear regularly credit card debt month to month and you’re having trouble paying it back, you can say thank you to your credit card company, but no thank you. After all, one of your jobs is to protect your financial reputation, and if an increase in your credit card limit makes that harder to do, you can say no.
But if you’re a bit of a credit protection pro and have a plan to repay the debta credit limit increase is a simple, no-frills way to boost your credit score.
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