Business SBA Updates

Increasing your credit limit is merely an opportunity to spend beyond your means, right? Not necessarily. In fact, increasing your credit limit can have a number of upsides if you manage your credit wisely. For example, it can help you repair your credit, make large purchases efficiently, or use credit to handle a sudden emergency. A higher credit limit can even boost your credit score.

There are at least six key benefits of increasing your credit limit.

KEY TAKEAWAYS
Increasing your credit limit can lower credit utilization, potentially boosting your credit score.
A credit score is an important metric lenders use to determine a borrower’s ability to repay.
A higher credit limit can also be an efficient way to make large purchases and provide a source of emergency funds.
If an increase in a credit limit encourages you to spend beyond your means, the mounting debt will likely outweigh any benefits.

  1. Lowers Your Credit Utilization
    The FICO credit-scoring model will ding your credit score if the amount of credit you’ve used is close to the total amount of the credit available to you. That’s because lenders consider you to be at risk of taking on too much debt, making it more difficult for you to make future payments. Even if these risks don’t actually apply to you, that’s how the scoring model works, and your credit score can suffer as credit utilization ratios increase.

For example, if you have a $2,000 credit limit and you regularly end up with a monthly balance of around $1,800, you’re using 90% of your available credit. Raising your credit limit will reduce the percentage of funds being used, lower the credit utilization ratio, and should improve your credit score.

  1. Cheaper and Easier to Get Loans and Additional Credit
    If your credit score is higher, you will have a better chance in the future of getting approved for a credit card, car loan, or mortgage. You’ll also have a better chance of getting a lower interest rate since your credit score determines whether you’ll be offered the best available rate or a higher, risk-adjusted rate.
  2. Helps in an Emergency
    Having a credit limit well in excess of your usual spending amount gives you a resource if you have a genuine emergency that you can’t pay for with cash. Say you’re traveling, and you need to change your plans and return home immediately. It probably won’t be cheap to change your plane ticket, and it’s convenient to pay for a plane ticket with your credit card.
  3. Helps You Earn More Rewards
    If you consistently pay off your credit card balance in full and on time, but you’re not putting all of your expenses on your credit card, it might be time to start. Having a higher credit limit can help you do that and increase the rewards you earn, such as cash back, points, or travel miles. The conventional wisdom says that you shouldn’t charge everyday expenses like groceries and gas to your credit card, but that advice only applies if you’re carrying a balance—it’s designed to help you avoid making a bad problem worse.
  4. Lets You Make Large Purchases Efficiently
    You already know that using your credit card to pay for large purchases is convenient and can help you rack up rewards. What you might not know is that your credit card likely includes a number of consumer protections that can come to your rescue if there is a problem with your purchase. For example, Mastercard’s protections include extended warranties, price protection, and coverage for damaged or stolen items.
  5. Helps You Avoid Credit Score Dings
    One way to get access to more credit is to get another credit card, but increasing your limit on an existing card might be a better option. According to FICO, opening a new credit card can ding your score. When you open a new account, it shortens the length of your credit history, and a long history often means an improved score. The age of your oldest account, the age of your newest account, and the average age of all your accounts are factored into the length of your credit history. This metric affects around 15% of your score.
  6. Helps You Avoid Credit Score Dings
    One way to get access to more credit is to get another credit card, but increasing your limit on an existing card might be a better option. According to FICO, opening a new credit card can ding your score. When you open a new account, it shortens the length of your credit history, and a long history often means an improved score. The age of your oldest account, the age of your newest account, and the average age of all your accounts are factored into the length of your credit history. This metric affects around 15% of your score.

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