Increasing your credit limit is merely an opportunity to spend beyond your means, right? Not necessarily. In fact, increasing your credit limit can have a number of upsides if you manage your credit wisely. For example, you can make large purchases efficiently or use credit to handle a sudden emergency. A higher credit limit can even boost your credit score. There are at least six key benefits of increasing your credit limit.
1. Lowers Your Credit Utilization
The FICO credit scoring model will ding your credit score if the amount of credit you've used is close to the total amount of the credit available to you. That's because lenders consider you to be at risk of taking on excessive debt, making it more difficult to make future payments. Even if these risks don't actually apply to you, that's how the scoring model works, and your credit score can suffer as credit utilization ratios increase.
- One benefit of increasing a credit limit is it can lower credit utilization percentages, potentially boosting an individual's credit score.
- Credit scores are an important metric when lenders seek to determine a borrower's ability to repay.
- A higher credit limit can also confer positive secondary effects, such as providing an efficient way to make large purchases and providing a source of emergency funds.
- If an increase in a credit limit encourages an individual to spend beyond their means, the mounting debt will likely outweigh any benefits derived from increasing the limit.
If you have a $2,000 credit limit, for example, and you regularly end up with a monthly bill of around $1,800, you're using 90% of your available credit. Raising your credit limit will reduce the percentage of funds being used, lower the credit utilization ration, and should improve your credit score.
2. Cheaper and Easier to Get Loans and Additional Credit
If your credit score is higher, you will have a better chance of getting approved for a credit card, car loan, or mortgage in the future. You'll also have a better chance of getting a lower interest rate since your credit score determines whether you'll be offered the best available rate or a higher, risk-adjusted rate.
3. Helps in an Emergency
Having a credit limit well in excess of your usual spending amount gives you a resource if you have a genuine emergency that you can't pay for with cash. Say you're traveling, for example, and you need to change your plans and return home immediately—it probably won't be cheap to change your plane ticket, and it's convenient to pay for a plane ticket with your credit card.
6 Benefits Of Increasing Your Credit Limit
4. Increases Your Rewards
If you consistently pay off your credit card balance in full and on time, but you're not putting all of your expenses on your credit card, it might be time to start. Having a higher credit limit can help you do that. The conventional wisdom says that you shouldn't charge everyday expenses like groceries and gas to your credit card, but that advice only applies if you're carrying a balance—it's designed to help you avoid making a bad problem worse.
On the other hand, if you never carry a credit card balance, paying for recurring expenses on your credit cards won't cost you anything and can help you earn more rewards. Those rewards can actually reduce your spending in other areas by helping you pay for vacations, gifts, clothes, and nights out.
5. Lets You Make Large Purchases Efficiently
You already know that using your credit card to pay for large purchases is convenient and can help you rack up rewards. What you might not know is that your credit card likely includes a number of consumer protections that can come to your rescue if there is a problem with your purchase. For example, MasterCard's protections include extended warranties, price protection, and coverage for damaged or stolen items. American Express offers similar benefits.
Check your credit card agreement to see what protections and restrictions apply to your cards.
6. Helps You Avoid Credit Score Dings
One way to get access to more credit is to get another credit card, but increasing your limit on an existing card might be a better option. According to FICO, opening a new credit card can ding your score—when you open a new account, it shortens the length of your credit history, and a long history often means a better score. The age of your oldest account, the age of your newest account, and the average age of all your accounts are factored into the length of your credit history, and this metric affects around 15% of your score.
The Bottom Line
If you know you're likely to spend up to your credit limit no matter how high it is, carrying the higher debt burden will probably outweigh any benefits from increasing your credit limit. Otherwise, consider requesting an increase. It's usually as simple as sending an email to customer service.