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How Will a Limit Increase Affect Your Credit Score?
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If you’ve been a responsible credit card holder for a while, you’ve probably gotten offers to increase your credit limit. And while that might seem like good news, you also may have wondered: How will this affect my credit score? Will it help, or could it get me into trouble?
The fact is, a limit increase could have either a positive or negative effect on your credit, depending on what you do with it.
To understand how your credit limit affects your score — and to help you decide if a credit limit increase is the right financial move for you — first it’s important to understand the factors that make up your credit score.
What are the factors affecting your credit score?
Your FICO Score, issued by Fair Isaac Corp., is made up of five different factors, all weighted differently. These factors help creditors determine if you have been responsible with credit in the past and if you are likely to pay your bills on time. In other words, your score tells lenders if you are a good credit risk.
Though these factors are weighted differently depending on your credit profile, the percentages presented here reflect their importance for the general population.
- Payment history (35%) — Making up the biggest percentage of your credit score, a payment history that shows no late payments indicates that you are probably a good credit risk.
- Amounts owed (30%) — Often called a credit utilization ratio, this number represents all your debt divided by all your available credit, as a percentage. Experts recommend keeping this number as low as possible, and definitely below 30%.
- Length of credit history (15%) — FICO wants to know how long you’ve been managing credit, and considers the total length of your credit history, the age of your oldest and newest accounts as well as the average age of your accounts when this number is calculated.
- Credit mix (10%) — While not a significant part of your score, lenders want to see that you can manage a variety of credit, including revolving credit card accounts and installment loans, such as a mortgage, car loan or student loan.
- New credit (10%) — Recently opening a new account, or multiple new accounts, may be a red flag to lenders. Similarly, having multiple new credit inquiries in your file within the past 12 months can lower your FICO score by a few points.
Now that we understand what goes into a credit score, let’s look at which areas a credit limit increase will affect, for better or worse.
How a credit limit increase can raise your credit score
Credit utilization, or amounts owed, is the second biggest factor in your FICO Score. If you increase your credit limit without charging more on your credit card, your credit utilization ratio will go down and your score will go up.
This effect can be almost immediate and, because your credit utilization is such a big part of your credit score, profound, depending on the amount of the credit limit increase.
For instance, let’s say you have a credit card with a $1,000 credit limit, and you owe $400 on it. Your credit utilization for that card is 40%, which is not ideal. If you double your available credit, now you are only using 20% of that card’s available credit — much better for your credit utilization ratio.
However, if you were to request a credit limit increase and only received an additional $200 in credit, your utilization ratio would be 33%. That’s still over 30%, which is the maximum lenders like to see. The credit limit increase would help your credit score, but not as much as that $1,000 credit limit increase would.
If your credit utilization is hovering around 30%, getting a credit limit increase may bump you down to 20% or less, which could raise your credit score.
By the same token, if you are planning a big purchase on credit, requesting a credit limit increase to keep your utilization at that 30% mark is also a good idea.
Remember that it’s also important to consider the negative ramifications of a credit limit increase before you make a decision that could affect your credit.
How a credit limit increase could reduce your credit score
If you are looking at your utilization ratios and decide to request a credit limit increase, your credit card company may check your credit score and pull your report from one or more credit bureaus.
This creates a hard pull on your credit file and can lower your credit score slightly for about a year. For most people, a credit inquiry will reduce your credit score by just a few points.
However, if you request multiple credit limit increases or open several accounts within the span of a few months, lenders could interpret this as a sign of increased spending or financial difficulties, which could make it harder to obtain additional credit at the best interest rates.
On the other hand, if your credit card company offers you a credit limit increase based on your past behavior of making on-time payments and keeping your credit utilization below 30%, accept it.
When a creditor issues a credit limit increase unsolicited, they aren’t permitted to do a hard pull on your file. Instead, this is a soft pull. You will be able to see an inquiry was made on your credit report, but it doesn’t affect your credit score. This is a good time to make sure to check your credit report for errors that could further damage your credit score — or prevent you from getting a credit limit increase.
Why it may be better to request a credit limit increase than to open a new card
If you’re looking to lower your credit utilization ratio or are planning to make a large purchase on credit, you might consider opening a new credit card instead of asking for a credit limit increase.
But opening a new account is more likely to have an adverse effect on your credit score.
When you open a new account, you will definitely get pinged for a “recent inquiry,” reducing your credit score by a few points. Even if you are preapproved for a credit card, the lender will pull your credit report and check your credit score before issuing the card.
New credit, on its own, makes up 10% of your credit score, so, again, you will lose points for opening a new card.
In addition, you will reduce the average age of your accounts and the age of your newest account, which affects the length of your credit history — 15% of your credit score.
It’s better to leverage the credit you have or take advantage of credit limit increases if you are planning a new purchase on credit.
Of course, if your credit score has gone up and you’re applying for a new card to take advantage of better rewards, lower interest rates and no annual fee, the future benefits your new card will bring might be worth a slight decrease to your score.
Any damage to your credit score caused by a new account will vanish as you continue to make on-time payments and keep your credit utilization ratio as low as possible.
So, you just got a credit limit increase — be careful
A credit limit increase may be a wiser financial choice than opening a new credit card, but it still has some inherent dangers.
Having a higher credit limit could entice you to spend more than you can afford to pay off — resulting in a higher credit utilization ratio, higher monthly payments and greater interest charges if you don’t pay your balance in full when it is due.
The more debt you have, the more likely it is that you will be in a situation where you can’t afford your monthly credit card payment. And, as late payments are the biggest factor in determining your credit score, that can make your FICO Score plummet.
Requesting an increase or not, that is the question
In short, if a credit card company offers you a credit limit increase — take it. Just be diligent about continuing to pay your bills on time and not charging more than you can handle.
If you are considering requesting a limit increase, think about the temporary damage it can do to your credit score. (Consider a credit repair service if you have further troubles.) Would it make more sense to put money into a savings account and pay cash for your purchase?
Another factor to consider: If the amount of the increase will put your credit utilization ratio under 30% and you don’t plan to make any new charges, it might be worthwhile.
As long as you are confident in your ability to manage the additional credit responsibly, a credit limit increase could be a smart choice to help you manage your credit and raise your credit score for the long term.