Will Increasing Your Credit Limits Affect Your Credit Scores?
If you have a credit card or any other line of credit, then there is a limit attached to that card or credit line. Many people wonder if they should increase their credit limits or reduce them. Your credit limits are a key part of your overall credit score, so it is wise to know how they affect it.
How Is Your Credit Limit Calculated?
When you first get a credit card or other line of credit, there is a limit assigned to your account. Every lender uses similar systems to determine your initial credit limit.
Some of the things they consider are your financial data, your payment history, your current credit score, and any income data they have. All credit and line of credit statements have your credit limit clearly stated on them if you are unsure or forget what your limit is on any specific card or credit line.
What Happens When You Exceed Your Card Limit?
Your credit utilization ratio partially determines your actual credit scores. It is a percentage ratio derived by dividing your total credit in use by your total credit limit. For example, if you have a $10,000 limit and have $5,000 on the credit card, your utilization rate is 50%. When you combine all your credit cards or lines of credit (like when you buy a refrigerator), then you have your total credit utilization rate. The higher your utilization rate, the more it will affect your score. A utilization ratio of 20 percent or less is generally considered to be good. Exceeding 20 percent can negatively impact your credit scores.
When you exceed your credit limit on your credit card, most of them will offer some overdraft protection. However, if you are unsure whether your card has overdraft protection, contact your card provider, and they will let you know the same. If you do not have such protection, any attempted transaction that exceeds your limit will be rejected. In most cases, you may have to pay a penalty fee if you exceed your limit. You will also probably see an increased interest rate on your card, which will add to your expenses when used.
Here’s What You Should Know Before Increasing Your Credit Limit
The Pros
Any time you increase your credit limit, you may use the additional spending amount. Still, it is not good to do this unless it is an emergency as such spending will increase your utilization rate and hurt your credit scores.
Raising your limits without spending the additional amount will reduce your utilization rates and improve your credit scores. It is one of the easiest ways to improve your credit scores. Of course, if you do not have a good payment history with your card companies, they will not increase your limit.
The Cons
As noted above, most people who do not manage their debt well benefit more by reducing their debt instead of increasing credit limits. If you are already struggling with payments that threaten to exceed your current limits, raising them will only land you in more outstanding debt.
How Can You Increase Your Credit Limit?
If you have a good record with any of your lenders, then you can request an increase in your credit limit from any of them. With good payment history, most of them will be willing to give you an increase. Thus, your total available credit will increase and lower your credit utilization rate and improve your credit scores. Keep in mind that credit utilization makes up almost one-third of your credit scores.
Should You Increase Your Credit Limit?
The general advice is not to do this unless you are sure you will not use the increased amount. If you have a well-established budget and can follow through, you may consider increasing your limits. If you do not have a budget or cannot keep to it, adding more potential debt is a bad idea.
Other Alternatives to Increasing Your Credit Limit
You can always apply for new lines of credit, personal loans, or credit cards. Just remember that all applications will be reviewed based on your recent payment and credit history. With a low credit score, you will most likely be unable to get new cards or loans.
A good plan for many people is to reduce their monthly expenses and establish a more realistic budget. Cut out unnecessary expenses or luxury items like getting your daily coffee from Starbucks or similar trivial, unnecessary expenses. If you track all your expenses, you will find things you can reduce or eliminate entirely, which though small, tend to add up quickly.
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