Even if you don’t normally carry a balance on your credit card, you may find that there are times when your spending levels get uncomfortable close to your credit limit. Having a well thought out budget can help keep your spending at a predictable amount each month, but there still may be times where unexpected expenses can cause you to come close to maxing out your card.
Once this happens, you might consider calling your credit card company to request a credit limit increase.
Before you ask for that credit limit increase, however, it’s important to understand the effects of doing so.
A Better Credit Score. When the increased credit limit gets reported to the credit agencies, you’re likely to see an eventual boost to your credit score. This is because one major factor in the calculation of your credit score is your “credit utilization” ratio, or how much of your total available credit you’re using. If your credit limits go up, but your balances stay the same, then that ratio goes down. The lower your ratio, the better.
Better Account Aging. Similarly, by increasing your credit limit on an existing account you may be able to avoid opening new accounts in order to meet your spending needs. Since newer accounts can be a negative factor towards your credit store – at least in comparison to having longer term accounts – a credit rate increase on an existing account can help.
Greater Opportunity to Overspend. Of course, an increased limit on your credit card means that there’s more of an opportunity for you to overspend. Your credit utilization ratio will only go down if your spending level remains the same after your credit limit increase. One negative effect of having a higher credit limit is the temptation – and opportunity – to overspend, so it’s important to stay aware of this and avoid any overspending.
Obtain Credit Card Protections on Larger Purchases. When you have a higher credit limit you’ll be able to purchase higher priced items on your credit card, rather than having to use in-store financing. This also means that you’ll have the various protections offered by your credit card company on those items. For example, credit card companies generally permit you to dispute charges for items that are defective, and often times this coverage exceeds the return policy of the store where you purchased the item. In addition, some credit card companies automatically provide extended warranty coverage on items purchased with their cards, and this can save you from having to purchase similar coverage from the store.
Emergency Financial Protection. While it’s good practice to build up a separate emergency fund to protect your finances in the event of an unanticipated expense, not everyone is able to do so as quickly as they should. Having additional credit available on your credit card can be a good interim solution. You’ll have to pay interest on any emergency expenses that you put on your credit card, of course, so having a higher credit limit shouldn’t stop you from continuing to build up your emergency savings fund.
A request for a higher credit limit can be a helpful thing, provided you fully understand all the effects of doing so.
Even if you don’t normally carry a balance on your credit card, you may find that there are times when your spending levels get uncomfortable close to your credit limit. Having a well thought out budget can help keep your spending at a predictable amount each month, but there still may be times where unexpected expenses can cause you to come close to maxing out your card.
