How to Increase Your Credit Limit

How to Increase Your Credit Limit - Pinterest graphicIf you have credit cards with low credit limits, you may be interested in increasing your credit limit. In this article, we’ll talk about why your credit limit is important, reasons to increase your credit limit, when and how to request a credit line increase, and more. Keep reading for everything you need to know about how to increase your credit limit.

How Does Your Credit Limit Affect Your Credit Score?

The obvious reason why you should care about your credit limit is that it controls the amount you can spend on that particular credit card. But beyond that, your credit limit also indirectly affects your credit score.

Although credit limit itself is not a factor in credit scores, it plays a role in your credit utilization ratio, which is an important part of your credit score. In fact, utilization makes up about 30% of a FICO score.

Your credit utilization ratio is the amount of debt you owe divided by your credit limit, typically expressed as a percentage. For example, if your credit card has a $10,000 credit limit and you owe $2,000 on it, your utilization on that card is 20% ($2,000 / $10,000 x 100% = 20%).

The above example is an individual utilization ratio since it is the utilization ratio of a single card. Your overall utilization ratio is similar, but it includes all of your revolving debt added together divided by the total credit limit of all of your revolving accounts. Both individual and overall utilization are accounted for in your credit score.

Why is utilization such an important part of one’s credit score? High utilization means high risk for lenders. If you are using most or all of your available credit, this indicates that you may be overextended and you might have trouble paying off your debts. Therefore, high utilization lowers your credit score because it means you are more likely to default.

Utilization makes up 30% of your FICO score.

Utilization (how much you owe) makes up 30% of your FICO score.

On the other hand, low utilization means you are not using very much of your available credit, which indicates to lenders that you are at low risk of defaulting. Therefore, keeping your utilization low is a good thing for your credit score.

Why Increase Your Credit Limit?

To bring this all back to your credit limit, remember that your credit limit affects your utilization ratio. Consider an example in which someone owes $500 on a $1,000 limit credit card. Their utilization is 50%, which is high enough to potentially have a negative impact on their score. But if they were to increase their credit limit to $2,000, their utilization would go down to 25% ($500 / $2,000 x 100% = 25%), which could help out their credit score.

Essentially, increasing your credit limit helps lower your utilization ratio, which can benefit your credit health.

Plus, it gives you more spending power if you ever need it to make a big purchase.

One important caveat: this strategy only works if you do not run up the balance on your credit cards. If increasing your credit limit means you will just continue to spend up to your credit limit and get in more debt, then it’s probably not a good idea.

How to Increase Your Credit Limit

There are a few different ways to go about raising your credit limit.

Wait for the credit card issuer to automatically increase your credit limit.

Lenders will often automatically bump up your credit limit after you have had the credit card after a certain amount of time, provided you have used it responsibly and paid on time every month. However, you usually have to wait several months after opening a card to be considered for a credit limit increase.

Request a credit limit increase.

If you haven’t gotten an automatic credit limit increase, you can request one. You can do this over the phone or on the credit card issuer’s website.

Generally, if you apply for a credit line increase online, this will result in a hard credit pull. However, if you call and talk to a representative, you may be able to get an increase with only a soft pull, depending on the situation.

When you request a credit line increase, you should be ready to provide your total annual household income, your employment status, and the amount of your monthly rent or mortgage payment. Credit card issuers typically state that you can include income from someone else if that person’s income is regularly used to pay your expenses.

Some lenders may ask you to explain why you need or deserve a credit line increase, so be prepared to explain the reason for your request. They may also inquire about how much you spend on credit cards each month.

When to Request a Credit Line Increase

It’s best to wait until the right time to request a credit line increase. Just like applying for a new credit card or loan, you want your credit and your income to be in good shape when you request it.

Potentially good times to request an increase:

A good time to request a credit line increase is after you get a pay raise at work.

A good time to request a credit line increase is after you get a pay raise at work.

After you receive a raise
After you have been a responsible cardholder for at least 6 months
If you have not requested an increase in at least 6 months
When you do not have many inquiries on your credit report
When your credit score is high

Situations when you might want to hold off:

If you lose your job or take a pay cut
If you have recent late payments or other derogatories
If your cards are maxed out or at high utilization
If you have only been making the minimum payments on your card
If your account is less than 6 months old
If your credit limit has changed within the past 6 months
If you have applied for multiple other credit cards or loans recently
When your credit score is low

How Much Should You Request?

There is no hard-and-fast rule when it comes to how much of an increase to ask for.

You could try calling your bank and asking the representative if there is an amount they could approve without doing a hard pull.

Another approach is to ask for more than you think you need. If the bank does not approve the full credit line increase that you asked for, they will often counter with the maximum amount that they can offer you.

Will Requesting a Credit Limit Increase Affect Your Credit Score?

Depending on the lender and the amount that you request, the credit card issuer may conduct a soft or hard inquiry on your credit. They want to see what your credit report looks like before taking the risk of granting you even more credit.

Check with your credit card issuer to see if requesting a credit limit increase will trigger a soft or hard inquiry.

Are Inquiries Killing Your Credit? Pinterest

Are inquiries really killing your credit? Click the image to read the article.

As we discussed in “Are Inquiries Really Killing Your Credit?” a hard pull could reduce your credit score by a few points, but it’s not the end of the world. As long as you keep your inquiries to a minimum, it shouldn’t present much of a problem. It’s when you have several recent inquiries on your credit report that you start to look like you are desperate for credit and you may get denied by lenders.

However, as we discussed earlier, the more significant potential impact to your credit score is the decrease in your utilization ratio if you do get approved for a credit line increase. Since utilization makes up about 30% of a credit score, improving that factor could benefit your score and would likely outweigh the impact resulting from a hard inquiry.

What Are the Downsides to Increasing Your Credit Limit?

Besides the impact on your credit score of potentially getting a hard inquiry, there are a few other drawbacks to consider when increasing your credit limit.

Some credit card issuers may charge sneaky fees to increase your credit limit. If you don’t want to pay a fee, make sure to check the terms of your card before requesting a credit line increase.

In addition, having access to more credit could encourage you to spend more, which could end up doing more harm than good to your credit score and to your overall financial health.

Other Ways to Increase Your Credit Limit
If you can't get a credit line increase on an existing card, you can open a new credit card.

If you can’t get a credit line increase on an existing card, you can open a new credit card.

You don’t necessarily have to ask for a credit line increase if you want to get a higher credit limit.

Another option is to transfer some or all of your credit limit from another credit card to the card you want to extend. However, with this method, the two cards need to be from the same bank, and not all banks allow customers to do this.

If your bank does allow credit limit transfers, you could open a new credit card with them, take advantage of any signup bonuses offered, and then transfer the limit to your older card. 

If transferring is not an option, opening up a new credit card with any bank will still increase your overall credit limit and utilization ratio, assuming you do not run up a balance on the card.

Have you tried requesting a credit limit increase before? Which of these methods do you plan to try next? Let us know in the comments below!

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What’s the “Right” Number of Credit Cards?

How many times have you read a blog or heard some financial “guru” opining as to the mystical “right” number of credit cards to have in your wallet? Is the right number one, or two, or three? And what is the criteria for considering what is the right number versus the wrong number?

I’ll let you in on a little secret, there is no right or wrong number. It’s just an excuse to write a blog. If you are comfortable with one credit card, then one is the right number for you. If you need four to operate efficiently, then four is your right number. If you hate credit cards, then maybe zero is your right number.

When considering the right or wrong number of credit cards, nobody ever seems to focus on credit scores as part of their consideration. Well, that’s exactly what I’m going to do. And the reason I’m going to do so is because from a credit scoring perspective there actually is a right number of credit cards.

The Revolving Utilization Ratio

There is a metric in credit scoring systems called revolving utilization. Revolving utilization, often referred to as the balance-to-limit ratio, is the relationship between your credit card balances and your credit card limits, expressed as a percentage.

The ratio is calculated by dividing the aggregate of your balances by the aggregate of your credit limits, thus yielding a percentage. The higher that percentage, the fewer credit score points you’re going to earn from that metric. The lower that percentage, the more points you’re going to earn.

Reports about the optimal percentage are all over the place, with many of them being wrong. For FICO the optimal percentage is actually 1%, which is next to impossible to pull off. So, we have to go to the average percentage for the people with the highest average FICO scores, those with 750 and above. For those folks the average utilization ratio is 7%. For VantageScore the optimal percentage is anything less than 30%.

Now, that doesn’t mean you have to have 7% or 30% in order to have solid credit scores. You’ll just need to hit those targets if you want the highest possible scores, something that’s infinitely important right before you apply for a loan.

What Is the "Right" Number of Credit Cards? Pinterest graphic

Let’s go back to the topic of this blog, which is the right number of credit cards. The right number for you is going to be the number of cards necessary for you to maintain 7% utilization relative to your normal credit card spending patterns. That way you don’t really have to worry about your credit scores, ever. If you can hit 7%, or close to it, on a monthly basis then you’ll do as well as possible under both credit scoring platforms.

What you need to do now is download your credit card statements from the last 12 months. Add up the balances from all of the statements, and divide that number by 12. That will give you your average monthly amount of credit card debt appearing on your credit reports. Let’s say, for illustration purposes, your average monthly balance from all of your cards is $5,000.

Now we just need to figure out what credit limits you need from all of your cards in order for $5,000 to represent 7% of the aggregate credit limit. I’ll do the math for you…you’re going to need about $70,000 of credit limits for $5,000 to represent 7% of the limit because $5,000 divided by $70,000 equals 7.1%.

$70,000 sounds like a really large number, but in the world of credit card credit limits, it’s actually not that big of a number.  In fact, if you have two credit cards each with limits of $35,000, you’re already there. For many of you, however, you’re going to need more than two cards.

This becomes the answer to your question about the right number of cards. If it takes six credit cards for your average monthly credit card balances to equal about 7%, then six cards is the right number for you. If it takes ten cards, or 13 cards, or three cards…then those are the right numbers for you.

John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group and the author of four books about consumer credit. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has 27+ years of experience in the consumer credit industry, has served as a credit expert witness in more than 370 lawsuits, and has been qualified to testify in both Federal and State courts on the topic of consumer credit. John serves as a guest lecturer at The University of Georgia and Emory University’s School of Law.

Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of Tradeline Supply Company, LLC.

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What Is the Difference Between Individual and Overall Utilization?

What is the difference between your overall credit utilization ratio and individual utilization ratios and why does it matter to your credit? Keep reading to find out.

Credit utilization makes up 30% of a FICO score.

Credit utilization makes up 30% of a FICO score.

What Is Credit Utilization?

To put it simply, credit utilization is the amount of debt you owe compared to the amount of your available credit. In other words, it is the amount of your available credit that you are actually using.

In terms of your credit score, credit utilization makes up 30% of your score, second only to payment history.

The reason credit utilization is such an important part of your credit score is that the ratio of debt someone has is highly indicative of whether they will default on a debt in the future. The more you owe, the harder it becomes to pay off all that debt on time every month, which makes you a riskier bet for lenders.

Components of Credit Utilization

According to FICO, there are several components that fall within the category of credit utilization, such as:

The total amount you owe on all accounts (overall utilization)

The amount you owe on different types of accounts

The utilization ratios of each of your revolving credit accounts (individual utilization)

The number or ratio of your accounts that have high balances

The amount of debt you still owe on your installment loans (e.g. mortgages, auto loans, student loans)

What Is the Difference Between Overall and Individual Utilization?

Your overall utilization ratio is the amount of revolving debt you have divided by your total available revolving credit.

For example, if you have one credit card with a $450 balance and a $500 limit and a second credit card with a $550 balance and a $3,500 limit, your overall utilization ratio would be 25% ($1,000 owed divided by $4,000 available credit).

However, the individual utilization ratios of your respective credit cards are 90% ($450 balance / $500 credit limit) and 16% ($550 balance / $3,500 credit limit).

Since credit scores consider individual utilization ratios, not just overall utilization, having any single revolving account at 90% utilization is going to weigh negatively on the credit utilization portion of your score.

Overall Utilization May Not Be as Important as You Think

Typically, when people think of the effect that credit utilization has on credit scores, they often assume that overall utilization is the most important variable.

By this assumption, it would be fine to have individual accounts that are maxed out as long as the overall utilization is still low.

Individual utilization ratios may be more important than the overall utilization ratio.

Individual utilization ratios may be more important than the overall utilization ratio.

However, we have seen that this is not always true.

For example, sometimes clients with maxed-out credit cards will buy high-limit tradelines in order to reduce their overall utilization ratio, but then they don’t see the results they were hoping for.

This means that the individual accounts with high utilization are still weighing heavily on the clients’ credit scores, despite the fact that they have improved their overall utilization. In other words, the decrease in the overall utilization ratio did not make much of a difference.

Cases like this seem to indicate that overall utilization may not play as big a role as traditional wisdom has led us to believe and that the individual utilization ratios may be more important.

This is one of the reasons why we typically suggest that consumers focus on the age of a tradeline rather than the credit limit. Although people tend to gravitate toward high-limit tradelines, the age of a tradeline is actually more powerful in most cases, especially considering that lowering one’s overall utilization ratio may not help very much.

How Do Tradelines Affect Credit Utilization?

Although the age of a tradeline is often its most valuable asset, tradelines can still help with some of the credit utilization variables. 

Since our tradelines are guaranteed to have utilization ratios that are at or below 15%, this means that at least 85% of that tradeline’s credit limit is going toward your available credit, which helps to lower your overall utilization ratio. 

Buying tradelines also allows you to add accounts with low individual utilization to your credit file, which can help to improve the number of accounts that are low-utilization vs. high-utilization.

Tips to Keep Your Credit Utilization Low

Spead out your charges between different cards

Since we have seen that it’s important to keep individual utilization ratios low, one strategy to accomplish this is to make charges on a few different credit cards instead of charging everything to one card. Spreading out your charges prevents an excessively high balance from accumulating on any one individual card.

If you spend a lot on one of your cards, consider spreading out your charges between different cards or paying down the balance more often.

If you spend a lot on one of your cards, consider spreading out your charges between different cards or paying down the balance more often.

Pay off your balances more frequently

If you do spend a lot on one card, it helps to pay off your balance more than once a month. If your card reports to the credit bureaus before you have paid off your balance, it will show a higher utilization than if you had paid some or all of the balance down already.

You can either time your payment to post just before the reporting date of your card or you can make payments several times per month. Some people even prefer to pay off each charge immediately so their card never shows a significant balance.

Set up balance alerts to monitor your spending

To prevent mindless spending from getting out of control, try setting up balance alerts on your credit card. Your bank will automatically notify you when the balance exceeds an amount of your choosing, so you can back off of spending on that card or pay down your balance.

Don’t close old accounts

Even if you don’t use some of your old credit cards anymore, it’s often a good idea to keep the accounts open so they can continue to play a positive role in your overall utilization ratio and the number of accounts that have low utilization vs. high utilization.

Ask for credit limit increases

Another way to decrease your utilization ratios is to call your credit card issuers and ask them to increase your credit limit.  By increasing your amount of available credit, you decrease your utilization ratio, both on individual cards and overall.

Individual vs. Overall Utilization - Pinterest

Keep in mind that your bank may do a hard pull on your credit to decide whether or not to grant your request, which could ding your score a few points temporarily. However, the small negative impact of the inquiry could be offset by the benefit of the credit line increase.

Also, this might not be an ideal strategy if you think you will be tempted to use the new credit available to you.

Open a new credit card

Like asking for a higher credit limit, opening a new credit card can also lower your credit utilization, provided you leave most of the credit available.

Again, this will add an inquiry to your credit report, as well as decrease your average age of accounts, so this could have a negative impact on your score temporarily, which may be outweighed by the decrease in your credit utilization.

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