Will the Request for a Credit Limit Increase Hurt my Credit?
07 Mar, 2018 / By Jennifer Hamilton
It is a common myth to believe that requesting a credit limit increase will hurt your credit score. In fact, the opposite is true in many cases – requesting a higher credit limit can benefit your credit score as long as you are responsible with your available credit. Of course, there are certain situations when it can hurt, which is why being an informed consumer is the best option. Before you ask for an increase, find out how this new credit could help or hurt your particular situation.
More Credit Equals a Better Credit Score
When you increase your credit limit, you have the capability of charging more on your credit card. That might be good news to you, but it depends on how much you already have outstanding on your card. In order for credit card balances to not negatively affect your credit score, you need to have a maximum of 20 percent of the available credit outstanding; this is called your credit utilization rate. For example, if you have a $2,000 credit limit, only $400 can be outstanding for it not to hurt your credit score. If you already have a balance on your credit card that is above that 20 percent mark, asking for an increase can help your outstanding balance percentage decrease and your credit score increase. In the same example, if you had a $2,000 credit limit, yet you had $1,000 outstanding, you are at a 50 percent credit utilization rate, which is frowned upon as it shows poor use of your credit. If you ask for an increase, your percentage will go down, making your situation look better and your credit score increase.
Watch the Type of Credit Inquiry
One problem with requesting a credit limit increase occurs if the credit card company wants to pull your credit. If they are going to pull a hard credit inquiry, which means that it will affect your credit score because it is noted as an attempt to obtain new credit; your score could go down. It might only go down a few points, but if you are on the brink between a good and fair credit score, those few points could make a difference. On the other hand, if they are going to pull a soft credit inquiry, your score will remain unaffected. This type of inquiry is similar to those that are done when you receive prequalification applications in the mail or even when you pull your own credit.
Watch How Much You Spend
It can be very tempting to go out and hit the stores when you hear the news that you have been approved for a credit line increase. If your utilization rate is currently low, meaning less than 20 percent, then you are free to use some of your new credit limit, but you must be responsible. Racking up too much credit, meaning anything over 30 percent can hurt your credit score in the long run. Credit utilization makes up 30 percent of your credit rating, which means that it could be hit quite significantly if you let it get out of hand.
Obtaining a credit limit increase can be good for your credit score in the long run. Before you call your credit card company, take a look at your finances and see what type of utilization rate you have. The card that you should be requesting the increased credit limit on is the one with the highest utilization rate. Ideally, credit bureaus want you to be at less than 20 percent of the available credit, but up to 30 percent is typically acceptable. Anything over those figures, however, greatly impacts your credit score; increasing your credit limit is the next best thing to paying the balances down or off.