Your credit card company reaches out to you, asking if you want a bigger limit. If it happens right before the holidays, this new limit might be an offer you can’t refuse.
An eleventh-hour boost to your spending can be helpful, but it also can cause trouble in the future. Here’s what you need to know about what a limit increase can do before you accept the offer.
Why Do Companies Offer a Limit Increase?
If you receive this offer, you have shown your credit card company you are responsible with this account. You likely pay all your bills on time and rarely carry over a balance when you can help it. Assuming nothing changes these habits, you’ll be able to handle a bigger limit.
That said, companies don’t extend these offers just for fun. They do so hoping you’ll use more of your credit, maybe even carrying a balance. Carrying over a balance is when card issuers earn the most money, as they can charge more interest on your account.
Increasing Your Limit Helps You Handle Emergencies
If your card issuer first approved you for a relatively low limit, say just $1,000, this original amount may not cover your next unexpected expense. Emergency medical expenses, auto repairs, and household repairs can easily go above and beyond this limit.
Increasing your limit boosts your safety net, giving you access to more cash in an emergency.
Raising your limit isn’t the only way you can nurture a more robust safety net. You can also add a line of credit to your financial toolkit. Take the time to compare an online lender like Fora with other options to learn about the costs in store with a new line of credit.
By shopping around, you might find a line of credit with more favourable terms than your existing credit card, making an increase impractical.
Raising Your Limit Augments Your Utilization Ratio
Your utilization ratio is one of the biggest factors of your credit score, second only to payment history. It shows how much of your limit you use at any given time as a percentage.
Generally speaking, financial advisors recommend keeping your ratio below 30%.
To figure out what your ratio is, you must divide your balance by your limit and multiply the product by 100. Since your limit is a factor in this ratio, anything that changes your limit will also influence your ratio.
Let’s look at the example below to see this in action:
- If you have a $5,000 balance on an account worth $10,000, your ratio is 50% — too high by most standards.
- If you accept an increase that bumps up your limit to $16,000, your ratio will come out to be roughly 31%, even if you retain the $5,000 balance.
For the biggest impact on your utilization ratio, pair a limit increase with paying down your balance.
A Bigger Limit is a Bigger Temptation
Be honest with yourself — would a larger limit tempt you to spend more money? This might not be a problem if you budget to pay off your entire balance by the due date. But if you lose track of expenses and wind up carrying over a balance, you’ll pay more in interest and finance charges.
In other words, you’ll pay more to be able to buy more. Keep this in mind if you have the option to increase your limit. You should only do so if you are confident you can pay your balance in full.