3 ways a credit limit increase can help your finances
If you’re spending more on your credit cards each month due to higher prices in the economy, you’re not alone. Credit card balances have grown over the past year at the fastest rate in two decades.
Spending more likely means you’re getting closer to your credit card limit, and that, experts say, means now might be a good time to ask for a higher limit. Your credit limit dictates how much you can spend on a specific card, but it also has wider effects on your finances.
Credit limit increases can help improve your credit score, says Beverly Harzog, author of five personal finance books and credit card expert for US News & World Report. But she doesn’t recommend making requests that are unlikely to be approved. If you have large debts and a low credit score, it’s best to wait to ask for a raise until you’re in a better situation, she said.
“I recommend asking for a credit limit increase only if you have a great payment history,” she says. “You don’t want to draw attention to yourself unless you can stand up to credit scrutiny.”
Requesting a limit increase can be as simple as a quick call to your card issuer or pressing a button in a banking app. But the ease of asking doesn’t mean it’s a good idea to ask for a higher limit just to go on a spending spree you couldn’t otherwise afford, fun as that sounds. You should always strive to pay your monthly credit card balance in full, and if you can’t, try to keep the balance as low as possible.
However, it may be a good idea to ask for a higher limit if you are shopping wisely and paying your credit card bills to the best of your ability, but you just find that you are spending more than your limit due to higher prices. .
Here are three reasons why asking for a credit limit increase can be a smart move.
Reduce your utilization rate
A higher limit will help lower your utilization rate – the amount you owe on your credit accounts as a fraction of your total line of credit. Lower utilization rates are generally associated with better credit scores, said Thomas Belding, a financial planner based in Chatham, New Jersey.
“If you increase your credit limit, it will actually reduce your usage and therefore may be a benefit to your credit rating, assuming you don’t just take that increased limit and borrow against it. “, he says.
Credit experts recommend keeping your utilization rate below 30% as a good rule of thumb to avoid a negative impact on your credit score.
Harzog generally recommends picking up the phone and calling your credit card issuer if you’re willing to ask for a limit. When you’re on the phone with a customer service representative, they advise you to specifically state that you’re requesting a limit increase because you’re monitoring your usage.
“Don’t hesitate to show that you know what you’re talking about,” she says.
You should also mention if your income has increased, as this can affect your chances of approval, she said.
Prepare better for an emergency
Having a larger line of credit can be useful in case of emergencies, such as unexpected expenses or a sudden loss of income. Eventually, your goal should be to build an emergency savings fund to cover these expenses, but a credit card may be your only option while you’re working toward that goal.
The catch is that these types of emergencies are often how people get into credit card debt. Still, if you have a high limit, your credit score won’t be affected as much if you need to spend more due to an emergency, Belding said.
“Things happen, and if you need that $3,000 or whatever, it’s a great tool to have as long as you can still manage to pay it back,” he says.
If you’re asking for a limit increase, you can even share your concern about emergencies as the reason for the request, Belding says. For example, you could tell the issuer that you drive an old car and are not sure what kind of expenses might arise.
When you apply, Belding recommends asking for a modest increase — no more than 30% to 50% more than your current limit. You can also ask your issuer if the request will involve a soft or hard pull on your credit. Whenever possible, you want to avoid the big hits because they can drop your credit score by a few points.
Earn more rewards
US credit card customers like to earn money on purchases they make with rewards cards, and a recent survey found that nearly half of rewards cardholders use their rewards to help offset some of the higher costs of everyday shopping.
If you have a relatively low credit limit that prevents you from putting much of your spending on credit cards, a higher limit could help you change that and enjoy rewards on more of your purchases.
Marc Lescarret, owner of Marc Alan Wealth Management, said he advises his clients to try using credit cards as a rewards program and encourages people to aim for a high limit on a card that offers a solid cashback.
“You borrow money for free, 30 days, [then] you get your 2% cash back or sometimes more,” he says. “That’s really what it’s for. »
If you successfully apply for a higher limit on a good rewards card, you’ll be able to spend more of your spending on that card without exceeding a 30% usage rate.
Keep in mind that if you’re not used to paying off your balance each month, whatever rewards you earn is likely eaten up by interest charges. In other words: don’t spend more on getting rewards if you can’t afford to pay if you don’t.
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