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.