So for this brief article, we’re going to touch on why you may need a credit limit increase, what steps to take and how it can affect your score in the short-term as well as long-term.
What is a credit limit increase?
When you get a new credit card account, chances are you were given a credit limit which is the maximum you can spend at any given time on that card. So if you applied for the Discover IT card and were given a limit of $1750, that is the maximum you can charge on the particular card.
Charge cards typically offered by American Express such as the Gold and Platinum cards, do not have a pre-determined limit set but it is always recommended to verify with the bank if you’re going to spend a significant amount in the near future.
Who allocates this limit and why ?
The issuing bank will grant you the credit limit keeping certain factors in mind. Are you a new borrower? Do you have a well established credit history? How much have you spent in the length of ownership of other accounts and have you been timely in your payments – all these are factors the Bank uses to allocate you a limit.
The initial limit is solely upto the discretion of the Bank/Issuing authority.
What are the Pros ?
For one, getting access to higher limits helps you make those big purchases you earlier couldn’t. Let’s say a DSLR camera for $2500 with a lens kit which earlier could not have been purchased with a $1750 limit, now can be (if the limit is raised to $2500 and over).
Additionally, your utilization may drop if your spending pattern remains the same.
Say you spend $300/mo on a $1750 limit and now spend the same $300/mo on a $2500 limit – your utilization effectively dropped and positively contributed towards building your FICO score.
You get bragging rights – but we don’t advise you to have such a childish behavior. No point in bragging about a $40,000 limit when you only make $12,000 annually.
What about the Cons?
The main concern with getting access to higher credit is that you may max out your card but not have the finances to pay it off. Taking hint from the example about, if you spent $40,000 you’d be left with a debt of at least $18,000 if not more.
This posses a risk not just to you but also to the bank if you abscond with the money (don’t pay off the card).
If you’ve had a relationship with the Bank long enough, they may give you an increase on their own or you may have to call them. When you ask a bank for a credit limit increase, always verify if it will involve a hard pull or a soft pull. A hard pull will involve an inquiry and if you get a hard pull, it will hurt your score (plus you may not necessarily get that increase).
It’s better to just apply for a new card and take that inquiry + new credit line than waste your time on a hard inquiry that maybe only gives you a $500 raise.
If it’s a soft pull, like Discover does, then there is no con.
Conclusion being getting credit line increases is justified if you’re going to have expenses that warrants them or it helps you i prove your score. Don’t do it for the flex value or to spend frivolously and abscond as you will face the consequences.