A credit limit is the maximum amount of money a lender will allow you to charge on a credit card or line of credit. It is determined by several factors, including; income, your ability to pay your bills on time, and your overall financial situation.
Once you reach your credit limit, you may not access more until you pay down your balance. However, some credit cards may allow you to go a little over the limit but they will have significant consequences.
A credit limit increase can be good or bad. If you routinely pay your credit card balance in full, or you're overall a responsible spender, then an increase can be good. But if you are not good with your finances and you're an over spender, this move might be risky.
Here are some benefits of increasing your credit limit:
The credit utilization ratio is a percentage of your available credit that is currently being utilized. In a nutshell, how much credit you are using compared to your available limit.
Let’s look at the following scenarios:
James has one credit card with an available credit limit of $5,000. He has a balance of $2,500. As a result, his credit utilization ratio is 50%.
Jane has two credit cards. Each of them has a $5,000 limit resulting to a total available credit limit of $10,000. Jane has a balance of $2,500. Because of her higher limit, her credit utilization ratio is 25%.
From the above scenarios, Jane is in a better situation because she has only used 25% of her available credit while James has used 50% of his. To catch up with Jane, James can pay down his credit card balances, apply for a new credit card, or request a credit limit increase.
1. Wait for an automatic increase
Some issuers automatically increase your credit limit if you have been handling credit responsibly. They check to see if you have been paying down your balances on time, frequently swiping your card, and charging a manageable percentage of your available limit. The upside of this is since you have not requested it, it doesn't require a hard inquiry on your credit card since they have already established that you are creditworthy.
2. Request a credit limit increase from your credit card issuer
Most credit card companies allow you to request a credit limit increase either through their website by logging into your online account and requesting a credit limit increase or by calling their customer service agents. Before submitting your request, beware that the company may perform a hard inquiry. The process is similar to applying for a new credit card.
A hard inquiry can lower your credit score, and may cost you a few points (not always). However, in this case, even if you lose a few points, the positive outweighs the negative since the benefits of a higher credit limit are amazing.
When you submit your request, the issuer might consider factors such as:
They use that information to evaluate whether you are creditworthy. Then they can either:
If you want an overall credit limit increase instead of a credit limit on a specific card, you can consider applying for a new credit card. The new card will come with its credit limit. But beware: this will result in a hard inquiry on your credit report.
A high credit limit can work in your favor or against you. Your limit should be high enough that you're spending 30% or less of it to be on the safe side. It would help if you weren't exhausting it all.
Want to understand how the credit system works and how you can make it work to your advantage? Grab our Credit Fundamentals course.