Banks try to strike a balance when customers open new credit card accounts. On one hand, banks want to offer cardholders a high enough credit limit that will allow them to spend as much as possible. But on the other hand, they want to limit their exposure to unpaid charges.
Ultimately, that leaves some cardholders with a smaller credit limit than they would like. Fortunately, cardholders can always request a larger credit limit.
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Why ask for a credit limit increase?
There are several reasons why cardholders may choose to request a credit limit increase. Obviously, they may need to borrow more money to finance purchases. While credit cards are a convenient and secure method of payment, the high interest rates for unsecured debts make these products poor instruments of finance.
A better reason to seek an increased credit limit is to make large purchases that will be paid in full. For example, frequent business travelers require a large line of credit to charge airfare, hotel, rental cars, meals and other expenses. And even when paying all of these charges in full, a traveler’s credit line must be able to accommodate up to seven weeks of charges from the beginning of a statement cycle and the following payment’s due date.
But the most important reason to ask for a larger line of credit is for cardholders to minimize their debt-to-available credit ratio. According to the Fair Isaac Corporation, the creators of the FICO credit scoring formula, the debt-to-available credit ratio makes up 30% of one’s score. One way to improve this ratio is to reduce outstanding debt, but another way is to increase the total amount of credit extended. (You can check to see how your debt-to-available credit ratio is affecting your credit by getting your free credit score from Credit.com.) The latter can be done by opening a new account or simply by requesting a credit limit increase from an existing credit card.
[Related Article: 6 Ways to Cut Your Credit Card Interest Payments]
Requesting a credit line increase
On occasion, banks will occasionally offer customers an unsolicited credit line increase. But more often, cardholders must take it upon themselves to make the request. When considering an increase, banks will look at several factors including the cardholder’s record of payment with the bank, their current income, and their credit score.
The good news is that most credit card users will show some improvement in these areas since their initial application. Most cardholders will have established a payment history, and people’s income tends to rise over time.
Asking a card issuer to increase your credit line can give you the purchasing power you need while raising your credit score. Remember, there is little to lose simply by asking for a credit limit increase; the worst thing that a bank can do is say “no.”
[Credit Cards: Research and compare credit cards at Credit.com]
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Jason Steele Jason Steele has worked as a computer systems administrator, a commercial pilot, and a contributor to several of the top personal finance sites as an expert on credit cards and travel. He is a graduate of the University of Delaware with a degree in history.
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The debt-to-available credit ration is SO important. I think a lot of people are uneducated as to this ratio and, as such, don’t realize that closing accounts (or having low limits and high pending balances) can really hurt their credit.
My father had great credit and had to make a large purchase that he wanted to spread the payments out over. The purchase price was close to his available limit; but he’d been a long-standing CC customer with the company in question. He called and asked for a credit limit increase before he made the purchase and they actually doubled his limit thanks to his great credit. He was able to make his purchase and his debt-to-available credit ratio wasn’t impacted as harshly!
Good example Dona,
If you ask for a credit increase they do a hard check on your credit and it affects your score.
Exactly, the majority of card issuers will do a hard pull on your credit reports if the consumer initiates the request. Most of the time, when the issuer issues an automatic credit limit increase, it is a soft pull. So yes, there is a disadvantage there, especially for those who carry more than one low-limit card and needs to initiate a request for each one. Then, those inquiries are on your report for 2 years, even though after one year they don’t affect your reports that much, unless you have so many inquiries that creditors are bound to notice and question them.