When you get approved for a new credit card, the issuer assigns a credit limit based on your income, credit score and other factors. Your limit is the maximum amount of money you can spend on one credit card. Once you reach your limit, you can’t spend more money unless you make a payment to increase your available credit.
Over time, you might qualify for credit limit increases, allowing you to spend more money on each card. Learn more about how raising your limit can help you strengthen your credit profile.
How to Get Credit Limit Increases
Generally, cardholders get credit limit increases in one of two ways. The first is to ask the issuer for a higher limit. Some companies allow you to request an increase online, while some require you to call and speak to a representative. If you ask for a limit increase, your credit card company may check your credit, resulting in a new inquiry on your credit report. Hard inquiries cause your scores to drop slightly, so think carefully before you ask for a higher credit limit.
The second is to wait until the issuer gives you an automatic increase based on your account history. Some financial institutions offer automatic increases when your credit scores go up, or you pay down a significant portion of your balance.
Benefits of Increasing Your Credit Limits
Increasing your credit limits has several potential benefits. One of the most important is that it helps you to reduce your overall credit utilization ratio. Credit utilization compares the amount of credit you’re using with the total amount of credit you have. For example, if you’re using $1,000 of your $10,000 limit, you have a utilization ratio of 10%. The lower your ratio, the better. Reducing your utilization ratio may help you qualify for new credit.
Higher limits can also make it easier to weather a financial emergency. For example, if you have a limit of $500, you don’t have enough credit to cover a burst pipe, a damaged water heater or a leaky roof — all of which cost $500 or more. If you have a limit of $3,000, however, you can easily cover a $500 emergency without maxing out your credit card and putting yourself in financial peril.
If you have a rewards credit card, increasing your limit also makes it possible to earn more rewards. Rewards cards typically give you points, miles or cash back based on your spending habits. If your card gives you 1.5% cash back, the most you can earn with a $500 limit is $7.50. With a $5,000 limit, you can earn $75 instead.
Finally, increasing your credit limits makes it easier to pay for large purchases. If you have three cards with limits of $500, $2,000 and $2,500, you can’t cover a $2,700 emergency unless you use all three cards. If you have a $3,000 limit, however, you can pay for a $2,700 bill with just a single card. This makes it much easier to manage your finances. Instead of juggling three payments, you can make a single payment each month until you pay off the balance.
Potential Pitfalls of Higher Limits
Although credit limit increases have several benefits, there are also some potential pitfalls. If you have high limits, you may be tempted to spend more than you can truly afford, making it extremely difficult to pay off high-interest balances. Unless you can pay the charges in a reasonable amount of time, it’s best to use another payment method.
Increasing your limits may also cause your credit scores to drop, especially if you max out one of your cards. The amount of debt you owe greatly impacts your scores, so the more credit you have available, the more debt you can incur over time. Avoid maxing out your credit cards or getting extremely close to the limits to avoid score decreases.
How to Use Your Credit Limits Wisely
Once you qualify for a credit limit increase, follow these tips to manage your limit wisely:
- Spend only what you can afford. If possible, don’t charge anything you can’t pay back right away.
- If you have an emergency, shop around before you use your card. You may be able to find a plumber, a roofer or a mechanic who charges less than other service professionals, reducing the amount of money charged to your credit card.
- Before you open a new credit card, look for accounts with 0% introductory APR promotions. This type of promotion allows you to avoid interest for a certain amount of time, usually 6, 12 or 18 months from the date you opened your account. If you qualify for a 0% APR offer, you can pay your charges over time without worrying about interest.
- If you have a rewards credit card, choose to redeem your points as a statement credit, which reduces your account balance. For example, if you have a balance of $200, a statement credit of $20 would reduce the balance to $180.
- Pay more than the minimum amount due each month to avoid paying hundreds of dollars in unnecessary interest.
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