When to Take a Credit Limit Increase

When to Accept, When to Ask, and When to Pass

Mail
Sometimes lenders send good news in the mail. Just be sure to read the fine print. Image Source / Digital Vision / Getty Images

Credit cards and other lines of credit come with a credit limit—the maximum you can spend before your lender stops providing money. But those limits aren’t set in stone—they can rise or fall over time.

Occasionally, lenders offer to increase your credit limit out of the blue. You might think it's a trap (why wouldn’t you want a higher limit?) but in many cases, there’s no catch. Especially if you have good credit and you always pay on time, this might be an offer worth accepting.

Credit Limit Increases Can Help Credit Scores

If a lender offers to increase your credit limit, that’s a good sign. The lender took a risk by offering any credit, and now they’re willing to take even more risk. During the financial crisis, things went the other way: lenders were slashing credit limits and closing accounts when they feared that borrowers would not be able to repay loans.

Why is it good to get a higher limit? It can lead to better credit. Your credit scores are based, in part, on how much of your available credit you use. The less you use, the better you look on credit scoring models. If you’re using almost all of your available credit (known as being maxed out) lenders worry that you’ve fallen on hard times and you might not be able to keep up with payments.

Example: assume your credit limit is $1,000 and you owe $200. You are using 20% of your total available credit because 200 divided by 1,000 is .20 or 20%.

This is a good place to be; lenders like to see you around 30% or lower.

Example #2: assume your credit limit is $1,000 and you spend roughly $800 every month on your credit card before paying it off completely every month. It can appear that you’re using 80% of your available credit—even though you pay off your entire balance and never pay any interest.

Depending on when lenders report your balance to the credit bureaus, this can cause problems.

Now, whether or not you should accept the offer depends on the type of offer.

A Free and Clear Offer?

If your lender will increase your credit limit with no strings attached, go ahead and accept. But make sure that the offer is yours for the taking. If you need to “get approved” or “qualify,” think twice—because then it may look like you’re asking for more credit (which was never your intention). It’s best if they say something like “you’re preapproved.”

If you’re not sure, call your lender (the credit card company, for example) and ask. Find out if they will review your credit and if they need to know anything about your income.

Again, a “free” credit limit increase will only help your credit scores. You don’t need to spend any more than you’re currently spending—just think of it as an extra safety net that you’ll hopefully never use. The only reason to decline might be if you simply don’t trust yourself to leave that credit untapped; if you’ll spend more (without paying it off) just because you can, then tell your lender to leave things as-is.

Requesting an Increase

If your lender is not simply giving you a pre-approved credit limit increase (in other words, if you need to qualify), proceed with caution.

The strategy can backfire any time you ask for an increase: your credit limit might actually get lowered, or your account might even be closed. Lenders like to lend to people who don’t need the money—when you’re desperate, they shut things down (or charge high interest rates). You don’t want to draw any attention to your account if they’re going to find something they don’t like.

What’s more, the process of reviewing your account can actually hurt your credit—at least in the short term. Your credit card company will make an inquiry to check your credit, and a hard inquiry in particular makes it look like you’re shopping for more credit. If you’re about to get a large loan such as a home or auto loan, inquiries can cause problems.

All that said, sometimes it makes sense to request a credit limit increase: your credit scores might dip temporarily, but eventually things should improve.

If you’re going to go for it, the best time to ask for an increase is when you don’t need it: ask when your account balance is low or zero (after you’ve made a payment), when you’ve got steady income from your job, and when you know your credit report is free of negative items.

As part of your request, you may need to explain why you want an increase. The best way to answer is not to say that cash-flow is tight and you need to spend more (you probably won’t get approved anyway if you’re struggling). It’s better to explain that you’re just trying to keep your credit usage low relative to your credit limits and that you probably won’t use the entire amount available to you. This is completely reasonable, especially if your monthly spending eats up a large portion of your credit limit (again, it makes the most sense if you pay off your card every month—​making minimum payments is a sign of trouble).

Other Benefits

If you're not into playing games with credit scoring models, there are other benefits to a higher limit. Having more money available means more options: you can use your credit card in an emergency, and (if you earn rewards on your card) you can use it for more types of purchases.