In the current economic pinch, there are lots of solid reasons to get your finances in order. Paying down debt balances and finding lower interest rates help to increase financial stability. It seems contrary to those goals to work on increasing your credit card limits, but doing so can improve your financial situation. Here are four ways that boosting your credit card limit can help you. (Avoid these pitfalls to keep your credit score healthy and your debt under control. See 6 Major Credit Card Mistakes.)

TUTORIAL: What To Know About Credit Cards

1. It improves your credit score.
It may seem like having lower credit limits would give you a higher credit score but, in fact, the opposite is true. A substantial portion of your credit score relates to the amount of revolving debt you have versus the limit you have available. That's because the score assumes that those who have access to credit that they haven't used can manage their credit better than those who have their credit cards maxed out. Therefore, increasing the limit on your credit cards while not increasing the balances gives your score a helping hand. If you think that you are likely to spend more if you have a higher credit card limit, however, consider whether this is the right strategy for you. Increasing your debt when you increase your limit will not improve your credit score and could even make it worse.

2. It gives you a margin of safety.
Having a credit card attached to your bank account can provide an inexpensive source of overdraft protection. If a transaction results in an overdraft, funds are automatically pulled from your card and you only have to pay the credit card interest until you made a payment on the card. In contrast, overdrawing your account with no backup payment source can result in overdraft charges of $35 to $45 for each charge plus interest. To make this strategy work, you must monitor your bank account and credit card regularly and pay your credit card as soon as you have funds in your account. Cash advances almost always incur interest from the day of funds withdrawal, so the sooner you pay it off, the less it will cost you.

3. It serves as a temporary emergency fund.
To be financially stable means having an emergency fund that would cover three to six months' worth of household expenses if an unexpected interruption of income happened. While you are building that fund, an increase in your credit card limit can provide some protection. While the goal is to not have to use up the new limit, having it available assists in paying for unexpected expenses or replacing income in the short term. It is an expensive method of financing emergencies but is far better than having no options at all.

4. It can be an inexpensive way to utilize your home's equity.
If you have equity in your house, you may be able to apply for a secured credit card. A secured card often has a much lower interest rate than a regular credit card because the balance is collateralized with your assets. This type of card is especially useful if you are undertaking house renovations. Rather than spending potentially hundreds of dollars on refinancing fees to re-mortgage your home or take out a second mortgage, you can use the secured card for renovation expenses.

TUTORIAL: How To Manage Credit And Debt

The Bottom Line
Raising the overall credit limits on your cards can give you more financing options and can lessen your financial risk. The caveat here is that you must have the willpower to not use your new limit unless it is absolutely necessary. If you raise your debt balances up to match your new limit, the benefits of the increase disappear. Managing your credit card debt wisely will pay off in both your credit report and in your financial planning goals. (The average American household has four cards, but does that mean more is better? Check out How Credit Cards Affect Your Credit Rating.)

Related Articles
  1. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  2. Credit & Loans

    Walmart MoneyCard Vs. Walmart Credit Card

    Discover how the Walmart MoneyCard and the Walmart credit card have different benefits that may influence your decision on which one to choose.
  3. Savings

    These 10 Habits Will Help You Reach Financial Freedom

    Learn 10 key habits for achieving financial freedom, including smart budgeting, staying abreast of new tax deductions and the importance of proper maintenance.
  4. Credit & Loans

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  5. Credit & Loans

    Personal Loan Rates: 6 Ways to Find the Best Deals

    Terms can vary tremendously, so you better shop around, both in person and online.
  6. Credit & Loans

    Personal Loans: Compare the 6 Biggest Banks

    Need a personal loan? You may stop by one of these big banks for help. Their offerings vary in size, rates and loan types, which means you have options.
  7. Credit & Loans

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  8. Credit & Loans

    How To Minimize Holiday Debt Before It Happens

    Holiday expenses can drown you in debt. Find out how to avoid this festive spending hangover.
  9. Credit & Loans

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  10. Credit & Loans

    These Are The Best Credit Cards For Making Balance Transfers

    Handled correctly – and very carefully – a promotional credit card balance transfer offer can save you money. Here are some of the best deals around now.
  1. Do free credit reports affect your credit score?

    Free credit reports do not impact your credit score. Credit inquiries are divided into two categories: soft inquiries and ... Read Full Answer >>
  2. Does a free credit report show your credit score?

    The free credit reports available from the three credit reporting agencies do not include your credit score. Under the 2 ... Read Full Answer >>
  3. How many FHA loans can I have?

    Generally, the Federal Housing Administration (FHA) does not insure more than one mortgage per borrower. This is to prevent ... Read Full Answer >>
  4. Does the Walmart credit card have an annual fee?

    The Walmart credit card does not charge annual fees to its cardholders. It does, however, have other fees associated with ... Read Full Answer >>
  5. Does NetSpend work with PayPal?

    NetSpend works with PayPal; a PayPal account can be linked to a NetSpend account, and vice versa. Also, PayPal allows its ... Read Full Answer >>
  6. How does NetSpend overdraft protection work?

    NetSpend offers overdraft protection that allows the account holder to make transactions or incur fees with amounts that ... Read Full Answer >>
Trading Center