Used strategically, an increase in your credit limit can benefit your bottom line.
Occasionally, you may receive a letter from your credit card company. He may say something like, “Congratulations! Because you are a wonderful customer, we are increasing your credit limit! Or he can say, “Congratulations! You may be eligible for a credit limit increase. To accept our offer, contact us at XXX-XXX-XXXX. “
Like the marriage proposals of two very different characters, you should jump on one of these offers and think long and hard about the other. Here we will discuss the two types of letters and help you determine when it is wise to accept the big offer.
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“We are increasing your credit limit”
If the company that issued your credit card tells you “we’re increasing your credit limit”, it 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 off as promised.
- The company is worried that you are not really interested and wants to keep you as a customer.
Either way, he wants you – he really wants you. If you are viewing your account online and the new credit limit has already been applied, you do not need to do anything else.
“You may be eligible”
The word “may” tells the whole story. Acting like you’ve won the County Fair Pig Calling Contest doesn’t actually promise you anything.
What is likely to happen is that your credit card company will perform a credit check to make sure you’re good at 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 ask the credit card company to go ahead, do a thorough credit check, and your credit score drops by five points. Five points isn’t a lot, and as long as you make all of your payments on time, it won’t take long for your score to bounce back.
Yet imagine that your car is almost dead and you have to buy a new one. To get 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 an increase in your credit limit, call the credit card company to find out what they plan to base their decision on. If he wants to see a copy of your latest W2 or some other type of income verification, that’s easy. If he is considering performing a thorough credit check, make sure that your credit score can take a slight drop.
If you can safely move forward without damaging your credit score, here are some compelling reasons to go for the increase.
Improves your credit score
One factor that goes into determining your credit score is called the “credit utilization ratio”. This ratio determines 30% of your FICO® score. Here is how it works:
Let’s say you have four credit cards, each with a credit limit of $ 2,500. This means that you have $ 10,000 of total credit available. If you owe $ 5,000 on these credit cards, you have a 50% usage rate ($ 5,000 ÷ $ 10,000 = 0.50).
Now imagine that one of those credit cards automatically increases your credit limit to $ 6,000. This means that you have a total available credit of $ 13,500 instead of $ 10,000. With this increase in the credit limit, your credit utilization rate 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
An 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 flexibility to charge any portion that you don’t have enough money to cover.
More reward points
No matter how many credit cards the average person carries, many of us have a favorite. For example, one person may want airline miles while another may prefer cash back. If your preferred credit card offers a limit increase, it gives you more options to use the card for your daily 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 a credit card every time you see something you want or need to borrow from one card to pay for another, increasing the limit may not be in your best interest. If you have credit card debt on a regular basis from month to month and are having trouble paying it off, 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 increasing your credit card limit is going to make it harder to do, it’s okay to say no.
But if you’re a bit of a pro at protecting your credit and have a plan to pay off your debt, increasing your credit limit is a simple, no-frills way to boost your credit score.