Credit

Is a Credit Line Increase a Good Idea?

by Lauren Steeves August 14, 2018

Do invitations for a credit line increase keep popping up in your inbox? Well, this is one offer you might not want to turn down.

Granted, it may not be the coveted bash-of-the-year ask you were holding out for, but it could help lead to a brighter financial outlook.

Of course, you should feel confident about the meaning and implications of a credit line increase. So here’s a breakdown on what it is, to help you decide whether or not you should RSVP “Yes for one.”

What’s a credit line increase?
 

Simply put, a credit line increase is an increase in your credit card spending limit. Most credit cards come with an initial spending limit. This limit is set by the credit card issuer, which takes into account factors such as credit history, credit score and income. Typically, when customers get their first credit card, this limit is relatively low. It may increase over time if the borrower demonstrates timely spending and repayment habits. These good habits may help build the borrower’s credit score, too.   

At times, issuers may evaluate your account and either increase your credit limit without you asking for an increase, or they may invite to request a higher credit limit. 

How can a credit line increase impact my credit score?
 

Here’s the deal: Your credit utilization ratio, which is the amount of your total credit card balances in comparison to your total credit card limits, plays a pivotal role in calculating your credit score. By increasing the credit limit on your credit card, you may improve your credit utilization ratio if you do not increase your spending – and that may have a positive effect on your score, according to credit scoring providers.

For example, say you have a credit card limit of $1,000, and every month you consistently spend $500, your credit utilization ratio is 50%, since you’re spending half of what you have access to. However, if you increased your credit line limit to $2,000 and continued to spend $500 a month, your credit utilization ratio automatically decreases to 25%.

If the credit line increase does not effectively lower your credit utilization ratio – that is, because you increase your spending commensurately – then having a higher credit limit will not help your score. And if you “max out” and spend up to your credit line maximum every month, the credit bureaus that record your credit history may associate you with higher-risk borrowing. Consistently spending too much on your credit card may lower your credit score, which can prohibit you from qualifying for the best rates on loans and mortgages, insurance policies and other financial products.

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Your credit utilization ratio...plays a pivotal role in calculating your credit score.
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Why should I consider a credit line increase?
 

Besides offering the prospect of a lower credit utilization ratio – which in turn helps maintain a positive credit score as long as you do not increase your spend on the card – a credit line increase can be helpful if you need to make big purchases.

First-time homebuyer Kaitlin Bauer got her credit line increase in place before her big milestone purchase. “Like many first-time home buyers, my home required some updates to the kitchen and bathroom, and it was in desperate need of an upgraded furnace,” Bauer says. “Luckily, before I took possession, my credit card company offered me a credit line increase. Knowing I would be entering a time in my life where my spending would increase, I accepted. With more credit, I was able to perform the upgrades my home needed, while having the comfort of not being in over my head.”

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With more credit, I was able to perform the upgrades my home needed, while having the comfort of not being in over my head.
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How to get a credit line increase
 

As mentioned, at times your financial institution or credit card company may issue an invite allowing you to request a credit line increase. According to CreditCards.com, you’re more likely to be approved if the bank sends the invite.

You can also request a credit line increase without an invitation. According to CreditCards.com, the best time to seek a credit line increase is when you’ve demonstrated your best financial behavior: A high credit score, consistent timely repayments and an increase in income are all important factors credit card issuers consider as part of the approval process. Be prepared to have your financial institution request key contact information and proof of income before considering you for an increase. If you have all these factors working in your favor, you’ve increased the likelihood that your request for a credit line increase will be granted.

Of course, like any application process, there is a chance you could be rejected. But don’t get discouraged. Instead, take it as an opportunity to work on improving your credit score. Once you’ve had time to do this, or you receive a bump in your income, consider reapplying.

A credit line increase could help you leverage opportunities on the path to your financial goals — which is an invitation worth considering.

Lauren Steeves enjoys helping others navigate the world of money and banking through simplifying concepts and processes. Her work has appeared in Notable Life, Branded Magazine and The Ace Class, among others.

 

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.