What to Do When You Receive a Credit Card Limit Increase Offer
If you use credit wisely you likely won’t know that a lender has checked up on you. However, if the “soft” check reveals a high credit score, you will receive limit increase offers. But there’s a fine line between what a lender says you can afford and what you know you can afford. You don’t need to accept what they offer you, or you could accept a reduced amount to stick within your comfort zone.
To help you decide whether or not to accept a limit increase offer, here are 4 key things to consider:
- Available Credit Can Get You Through an Emergency
It’s easy to think that you’ll apply for more credit when faced with an emergency, but that will often lead to a decline. For instance, if you lose your job and need a line of credit to get by until you find another job, without income your lender will be unable to grant you the loan.
To prepare for the unexpected, having credit available to you that you don’t routinely use, along with emergency savings to cover your basic expenses for a few months, is wise financial planning that will help you navigate the bumps in the road.
- Higher Limits Can Improve Your Credit Score
Higher limits on your credit cards will decrease your credit utilization ratio, which is one factor in the calculation of your credit score. Credit utilization simply means how much of your available credit you’re using at any point in time. The lower the ratio, the better. For instance, if you have 2 credit cards with a combined limit of $10,000 and a total amount owing of $7,800, your credit utilization ratio is 78%.
But if you increase the limit on 1 of the cards so that the combined limit is now $15,000, with the same $7,800 still owing, your ratio drops to 52%. Keeping your balance owing on each account below about 65 per cent of the limit helps to protect your credit score.
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- High Limits Can Prevent You from Obtaining Other Credit
Where a higher limit on your credit cards can help increase your credit score to make other borrowing more attractive, those same higher limits can mean that you qualify for less additional credit. While this might sound backwards, the reason makes sense. You only have so much money to make payments with. If you’re close to that limit with the products you already have, there’s less room to lend you more.
That limit, when a lender is unable to lend your more, varies. At your bank or credit union the limit is normally 40% of your gross income. If you earn $4,500 before tax each month, that means a maximum of $1,800 can be committed to your payments. This calculation is called your total debt service ratio (TDSR) and it includes your rent, cell phone payment if you have a contract with your service provider, current monthly loan payments, and the minimum requirement payment on your credit cards.
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When some lenders calculate this ratio, they base your minimum credit card payment amount not on what you normally owe, but on the limit of your card. The higher the limit, the higher the (potential) minimum payment – and the less additional credit they can lend you. It can mean the difference between buying the car you want and the one that simply moves you from A to B.
Lenders use the potential minimum payment amount because you already have that credit available to you. If you were to utilize it after they approve you for the additional credit you may run into problems keeping up with all of your payments. Ultimately, this is for the creditor’s protection but it also benefits the borrower.
- More Available Credit Can Lead to Temptation Spending
More available credit means you’ve got more ability 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’s available to them is simple too great to resist. If you add in enticements like loyalty points or travel rewards and the ability to fulfill our wishes instantly, it’s a recipe for debt.
If a lot of available credit makes you feel richer than you really are, it’s probably best not to accept a limit increase and work within what you already have available.
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