Will increasing my credit limit improve my credit rating?


Question:


The seasonal work that I have found turns out to be more seasonal than I expected. I use my credit cards to fend for myself while I find another job, and I am getting closer to the limits of each one. Through my online banking, I got offers to increase the limit on two of my credit cards and I wonder if they offer, what’s the harm in accepting. And if I need more money, at least I don’t need to apply again. A friend told me that a higher credit limit can even improve my credit rating. Is it worth allowing them to increase the limits? ~ Jocelyne

A:

When charge cards first became available in Canada in the late 1960s, they were known as “charge cards” because there was no credit extension. They were only a means of payment and the full amount was due and payable monthly. It didn’t take long, however, for financial institutions in Canada to realize the lucrative “credit cards” offered south of the border. Today, credit cards are an integral part of the financial affairs of most Canadians, with hundreds of millions of credit cards in circulation around the world.

Savvy consumers have discovered how to use their credit cards as payment cards. They reap the rewards and avoid the inconveniences. But many like to curse their cards and all the hardships they have because of them. The credit cards themselves, however, are not the problem. It’s just little plastic cards with shiny logos that fit into our financial toolboxes.

When used correctly, as with any other tool, the results can be spectacular; but when misused, the consequences can be disastrous. When it comes to taking on credit card debt, your future purchasing power is drastically reduced. Not only do you have to repay what you charged on your card, but you also need to allocate income to interest payments and fees. As a result, anything you buy can be up to 50% more expensive than the price of the original sticker.

When it comes to increasing your credit card limit, only you know how you manage your money and whether or not you can afford a higher limit. If a lot of available credit sends you into a spending spree, you could be doing yourself more harm than good. If you’re happy that you know it’s there if you need it, and budgeted for extra payments when you use it, then a higher limit might be right for you. Before making your decision, it can be helpful to understand the impact that a higher limit can have on your finances and your decisions in general.

Credit Limit Increase Offers Are A Marketing Tool


Financial institutions and credit card companies regularly check their customers’ accounts to see where additional business opportunities may exist. They conduct informal inquiries into the accounts of clients who have consented to credit checks for everything from opening a bank account to applying for a line of credit or mortgage. Part of the consent that a customer signs allows for these ongoing checks.

An indirect request means that the creditor only checks their own products or accounts with any credit bureaus that a customer may have, and the request does not affect someone’s credit rating. If you’re curious about which creditors are checking your accounts there, request a free copy of your own credit report. These inquiries will be listed for you. By performing a smooth check, the creditor can quickly determine if the credit account is being used correctly, if someone is late, or if there is room to offer more credit to the customer.

If you’re falling behind a lot, there’s a good chance the lender will tighten their terms. This could mean notifying you of an increase in interest rates or a decrease in the current credit limit, changes to other terms or conditions, or in extreme situations the lender will “call the loan”. “. This means that they will make the total amount due due and payable immediately. When it comes to a credit card, it can no longer be used to make purchases and a refund of the full amount owed is required.

5 Warning Signs You May Have Too Much Debt

Those who use credit prudently will usually not be more aware that the lender has performed a check. However, those where the bounced check returns a high credit score will become the focal point of marketing offers. Remember, however, that just because they are offering a limit increase on your credit cards, it doesn’t mean you’d be wise to accept it. There is a fine line between what the lender says you can afford and what you know you can afford.

Here are four key considerations when deciding whether or not to accept a limit increase offer:

1. More credit available means more help in an emergency


Credit is not the same as money, but in a pinch, having credit at your disposal can be crucial. Ironically, however, when you really need more credit, this is often the hardest time to get. For example, if you are laid off and need a line of credit to make ends meet until you are called back, once your income wears off, your ability to get a new line of credit decreases. also.

To prepare for the unexpected, have credit that you don’t use regularly, as well as emergency savings to cover your basic expenses for a few months. It is smart financial planning that will help you overcome obstacles down the road.

2. A Higher Limit Can Improve Your Credit Score


Higher limits on your credit cards will lower your credit utilization rate, which is a factor in calculating your credit score. Using credit simply means how much of your available credit you are using at any one time. The lower the ratio, the better. For example, if you have three credit cards with a combined limit of $ 12,000 and a total amount owed of $ 9,000, your credit utilization rate is 75%.

However, if you increase the limit of two of the cards so that the combined limit of the three cards is now $ 18,000, with the same $ 9,000 still owed, your ratio drops to 50%. Keeping your balance owed on each account below about 65 percent of the limit helps protect your credit score.

How credit scores are calculated in Canada

3. Your borrowing power decreases with high limits


While a higher limit on your credit cards can help boost your credit score to make other borrowing more attractive, those same higher limits can mean you qualify for less additional credit. The reason is simple: there is only a limited amount of available credit that you can afford to repay. If you are near that limit with the products you already own, there is less room to lend you more.

This limit, when a lender is unable to lend you more, varies. In your bank or credit union, the limit is normally 40 percent of your gross income. If you earn $ 4,200 before tax each month, that means a maximum of $ 1,680 can be allocated to your payments. This calculation is called your Total Debt Service Ratio (TDSR) and it includes your rent, your cell phone payment if you are under contract with your service provider, the current monthly loan payments, and the minimum required payment on your credit cards.

12 key things to know before applying for credit

When some lenders calculate this ratio, they are basing your minimum credit card payment amount not on what you normally owe, but on your card limit. The higher the limit, the higher the minimum (potential) payment and the less additional credit it can lend you. It can be the difference between buying the car you want and one that just takes you from A to B.

Lenders use the potential minimum payment amount because you already have that credit. If you were to use it after they gave you the extra credit, you might have difficulty meeting all of your payments. Ultimately, this is for the protection of the creditor, but it also benefits the borrower.

4. Self-control can be more difficult when you have more credit available.


More credit available means you have more options to buy things now and pay for them later. And that’s the tricky thing with credit. We all know how it works, but for many the temptation to spend what is available to them is just too great to resist. When you add incentives like loyalty points or travel rewards and the ability to make wishes come true instantly, that’s a recipe for debt.

You know your habits best. If a lot of available credit makes you feel richer than you actually are, it’s probably best to forgo a limit increase and work with what you already have.

Could you break away from your credit card for 3 months?

The basics of whether or not to accept a credit card limit increase offer


Many Canadians have a love or hate relationship with their credit cards. They love the convenience, security, perks, and status of their flexible friend. But a card quickly becomes an enemy when it comes with big bills, high interest charges, and tempting expenses that are hard to control. Avoid turning your lifeline into an anchor that pulls you down. Only ask for and accept credit that you can reasonably handle, because as Mark Cuban once pointed out, “Credit cards are the worst investment you can make. ”

Associated reading:

12 of the fastest ways to get out of debt

What Does It Really Take To Repair My Credit?

Debt consolidation with a credit card balance transfer

Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott by

E-mail

, Check

nomoredebts.org

or dial 1-888-527-8999.

Copyright Postmedia Network Inc., 2021


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