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By Kathryn Pins
Your credit limit is the loan amount you can take out on any lines of credit you have. A credit card can have a line of credit anywhere from a few hundred dollars to thousands of dollars. So, how important is it to have a high line of credit? You may be surprised to know that a higher credit card limit that is used responsibly can lead to more opportunities for loans in the future. We break down why a higher credit card limit could be a really good thing for you.
Yes, a credit limit increase can impact your credit score in two ways: it can increase your score by lowering your credit utilization ratio, and if the credit card company needs to pull your credit, then your score could temporarily decrease.
In the long run, a higher credit card limit could significantly help your credit score. Many factors go into your credit score, including credit utilization, which makes up 30 percent of your score. Utilization is one of the most important factors to a good credit score. It is the ratio of credit you’re currently using to the total amount of credit available to you. Utilization takes into account all of your lines of credit (any credit cards and HELOCs).
For example, if you have $5,000 of credit card debt and a total credit card limit of $20,000, your utilization rate is 25 percent. A good utilization ratio is typically under 30 percent. Any ratio less than 10 percent is even better. By asking for a credit line increase, you can help lower this ratio, as long as you don’t increase your spending.
Sometimes a credit increase request will require a hard credit pull. This means that your credit score could see a short dip because of this credit inquiry. If you are in the market for a large loan, such as a mortgage or auto loan, then you may want to avoid hard credit pull situations. Before you ask for a higher credit card limit, simply ask if it will require a hard credit pull.
A higher credit card limit could hurt your credit score if you spend more and don’t pay your bills on time each month. This is because payment history is the most important factor to your credit score. (If you know the temptation of the new credit is too much, then an increase could hurt you in the long run.)
Credit card issuers will look at the following factors to determine if you are eligible for a credit limit increase:
If these things moved in a positive direction in the last year, then you will be more likely to get approved for an increase.
Sometimes a credit card issuer will alert you that they are increasing your credit card limit. They will do this if you’ve been responsible making payments and if you use the card frequently. When you accept these credit limit increases, you could help your credit score without doing the legwork.
If you have not had an increase or have not opened new lines of credit recently, then you can submit a request. A simple phone call to your credit card issuer will work. There are also some companies that will let you submit a request online or with their app.
Your issuer could deny the increase, propose a lower number if you asked for a specific limit, or give you exactly what you want.
Getting a higher credit card limit is just one of the ways you can help your credit score. It’s important to know how your credit score is calculated. Once you know the basics, you can score an even higher credit score.
Kathryn Pins is a marketing content specialist at Alliant. She’s passionate about finding and communicating meaningful financial information with Money Mentor readers. Kathryn is a saver who gets more excited about certificates and her Roth IRA than shopping. When she does spend her earnings, it’s on furthering her education, travel, unique experiences, and loved ones.