Credit Line Increases Can Hurt and Help Your Credit Score

Credit Line Increases Can Hurt and Help Your Credit Score

While it generally makes sense to raise credit lines periodically to increase your available credit and credit utilization. it can also backfire if you aren’t responsible.

Many credit line increase requests count as hard credit inquiries. which will be documented on your credit report for two years, and count against your credit score for one year.

Though the impact may be minor, a 5-10 point hit could still drop you into a lower credit bracket. costing you on the next loan you take out.  During this time, other creditors may shy away from offering you new or extended credit because of your recent line increase/request.

Think of it this way. If you request a credit line increase, and then a month later decide you want to apply for a new credit card because it offers 0% APR for 15 months, the card issuer may decline your application because of that prior credit limit increase.

The way the card issuer sees it, you just applied for more credit a month ago, and for that reason you’re deemed a higher-risk applicant, at least for the time being.

It’s also possible to be denied when making your credit line increase request – there’s no guarantee it’ll go through.  Additionally, the credit card issuer may ask for income documentation to verify that you actually make what you say you make every year in order to approve the increase.

Don’t Increase Your Outstanding Debt

Assuming your request for a larger credit limit is approved, don’t take it as an invitation to spend more. Sure, you may have made the request so you can put some large purchases on your card temporarily, but be sure to pay them off quickly to avoid an even larger credit hit.

After all, maxing out your credit card can be nearly as bad as a missed payment

as far as your credit score is concerned. It also doesn’t make sense to charge up a card that has APR greater than 0% as finance charges will get pricey in a hurry.

Instead of requesting a credit line increase for this purpose, you may want to consider opening a new credit card that offers introductory APR for a certain period of time, such as 12-15 months.  That way you’ll have more credit at your disposal, and you’ll be able to carry a balance without incurring any finance charges.

How a Credit Limit Increase Can Benefit You

While I focused largely on the pitfalls of a credit limit increase, there is the potential to see your credit score increase as a result, it just might take some time.

Let’s assume your existing credit line is $10,000 and your outstanding credit on the card is currently $5,000. This would give you a 50% credit utilization ratio, which is higher than you want it to be.

If you make a request for say a $15,000 credit limit and the card issuer obliges, your credit utilization will improve to roughly 33%, which will give your credit score a boost as time goes on.

This is the case even if your outstanding balance doesn’t change because more available credit will mean your less of a credit risk.  Sure, you’ll want to pay off that balance sooner rather than later, but both FICO and VantageScore consider available credit when calculating your score.  The more available credit you have, the better off you’ll be in their eyes.

Remember, it’s not always necessary to bump up your credit line, especially if you’ve already got a decent percentage of credit available. And never raise your credit lines before or while applying for major loans like mortgages and car loans, as you could jeopardize that financing.


Category: Credit

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