The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I took on too much debt and went without a job for 23 months. I am now employed and currently paying off my last, charged-off credit card. Should I open a new line of credit or just continue to pay my debt to rebuild my credit?
Getting back on your feet after a period of unemployment and high debt is a huge accomplishment. Rebuilding your credit depends on multiple factors and on where you stand with your overall credit and finances. So, in your situation, I recommend doing it all: pay all your bills on time, continue to pay down your debt, and rebuild your credit health with positive account activity and a new line of credit.
As you work to improve your credit, you should know which factors influence your score and learn how to use them to benefit your score. These factors include paying your bills on time, keeping your utilization ratio low, how often you get new credit, the types of credit you have, and for how long you’ve had credit.
Ways to Improve Your Credit
Arguably, the most important thing you can do for your credit is always paying your bills on time. This should become second nature so that you build your credit now and maintain a good score in the future. Then, if you don’t have an active account on your credit files, you could apply for a new credit card in order to generate a positive credit history on your credit reports. One sure way to open a new account is to apply for a secured credit card. Secured credit cards are offered by many banks and have a variety of perks and fees. Apart from looking and acting like any other type of credit card account, the primary differences are that you are approved without a credit check and you need to send a security deposit when you open the account. This deposit typically becomes collateral that establishes your credit limit and it’s returned to you if you close the account or if your account is upgraded to an unsecured credit card.
Be Strategic
Once you have your credit card, use it strategically. This means paying on time and keeping your utilization ratio below 30%. Your utilization ratio is how much of your available credit you are using. So, when you have high credit card debt, you appear at risk of losing control of your financial stability, which brings your score down. That’s why you should continue to pay off your debt in order to reduce your utilization ratio.
The other factors—the age of your credit, the types of credit you have, and how often you use your credit—are also important to a lesser degree. How old your credit is only will improve with time, so be patient. The mix of credit looks at the type of credit you have—credit cards and loans. But, right now, let’s focus on the primary factors. And last but not least, that’s how often you apply for new credit. When you ask for a new credit line, a hard inquiry is generated, and it remains on your report for 24 months. Too many inquiries bring down your score. So, you must be selective and strategic about getting new credit lines.
As you can see, building your score comes down to being strategic about how you use your credit in every transaction. When you have the tools and the right plan to improve how you manage your credit, it becomes easier to make financial decisions that build a stronger credit rating. If you need help with more personalized strategies to work on your credit, you can reach out to an NFCC Certified Financial Counselor.
If you have credit cards with low credit limits, you may be interested in increasing your credit limit. In this article, we’ll talk about why your credit limit is important, reasons to increase your credit limit, when and how to request a credit line increase, and more. Keep reading for everything you need to know about how to increase your credit limit.
How Does Your Credit Limit Affect Your Credit Score?
The obvious reason why you should care about your credit limit is that it controls the amount you can spend on that particular credit card. But beyond that, your credit limit also indirectly affects your credit score.
Although credit limit itself is not a factor in credit scores, it plays a role in your credit utilization ratio, which is an important part of your credit score. In fact, utilization makes up about 30% of a FICO score.
Your credit utilization ratio is the amount of debt you owe divided by your credit limit, typically expressed as a percentage. For example, if your credit card has a $10,000 credit limit and you owe $2,000 on it, your utilization on that card is 20% ($2,000 / $10,000 x 100% = 20%).
The above example is an individual utilization ratio since it is the utilization ratio of a single card. Your overall utilization ratio is similar, but it includes all of your revolving debt added together divided by the total credit limit of all of your revolving accounts. Both individual and overall utilization are accounted for in your credit score.
Why is utilization such an important part of one’s credit score? High utilization means high risk for lenders. If you are using most or all of your available credit, this indicates that you may be overextended and you might have trouble paying off your debts. Therefore, high utilization lowers your credit score because it means you are more likely to default.
Utilization (how much you owe) makes up 30% of your FICO score.
On the other hand, low utilization means you are not using very much of your available credit, which indicates to lenders that you are at low risk of defaulting. Therefore, keeping your utilization low is a good thing for your credit score.
Why Increase Your Credit Limit?
To bring this all back to your credit limit, remember that your credit limit affects your utilization ratio. Consider an example in which someone owes $500 on a $1,000 limit credit card. Their utilization is 50%, which is high enough to potentially have a negative impact on their score. But if they were to increase their credit limit to $2,000, their utilization would go down to 25% ($500 / $2,000 x 100% = 25%), which could help out their credit score.
Essentially, increasing your credit limit helps lower your utilization ratio, which can benefit your credit health.
Plus, it gives you more spending power if you ever need it to make a big purchase.
One important caveat: this strategy only works if you do not run up the balance on your credit cards. If increasing your credit limit means you will just continue to spend up to your credit limit and get in more debt, then it’s probably not a good idea.
How to Increase Your Credit Limit
There are a few different ways to go about raising your credit limit.
Wait for the credit card issuer to automatically increase your credit limit.
Lenders will often automatically bump up your credit limit after you have had the credit card after a certain amount of time, provided you have used it responsibly and paid on time every month. However, you usually have to wait several months after opening a card to be considered for a credit limit increase.
Request a credit limit increase.
If you haven’t gotten an automatic credit limit increase, you can request one. You can do this over the phone or on the credit card issuer’s website.
Generally, if you apply for a credit line increase online, this will result in a hard credit pull. However, if you call and talk to a representative, you may be able to get an increase with only a soft pull, depending on the situation.
When you request a credit line increase, you should be ready to provide your total annual household income, your employment status, and the amount of your monthly rent or mortgage payment. Credit card issuers typically state that you can include income from someone else if that person’s income is regularly used to pay your expenses.
Some lenders may ask you to explain why you need or deserve a credit line increase, so be prepared to explain the reason for your request. They may also inquire about how much you spend on credit cards each month.
When to Request a Credit Line Increase
It’s best to wait until the right time to request a credit line increase. Just like applying for a new credit card or loan, you want your credit and your income to be in good shape when you request it.
Potentially good times to request an increase:
A good time to request a credit line increase is after you get a pay raise at work.
After you receive a raise After you have been a responsible cardholder for at least 6 months If you have not requested an increase in at least 6 months When you do not have many inquiries on your credit report When your credit score is high
Situations when you might want to hold off:
If you lose your job or take a pay cut If you have recent late payments or other derogatories If your cards are maxed out or at high utilization If you have only been making the minimum payments on your card If your account is less than 6 months old If your credit limit has changed within the past 6 months If you have applied for multiple other credit cards or loans recently When your credit score is low
How Much Should You Request?
There is no hard-and-fast rule when it comes to how much of an increase to ask for.
You could try calling your bank and asking the representative if there is an amount they could approve without doing a hard pull.
Another approach is to ask for more than you think you need. If the bank does not approve the full credit line increase that you asked for, they will often counter with the maximum amount that they can offer you.
Will Requesting a Credit Limit Increase Affect Your Credit Score?
Depending on the lender and the amount that you request, the credit card issuer may conduct a soft or hard inquiry on your credit. They want to see what your credit report looks like before taking the risk of granting you even more credit.
Check with your credit card issuer to see if requesting a credit limit increase will trigger a soft or hard inquiry.
Are inquiries really killing your credit? Click the image to read the article.
As we discussed in “Are Inquiries Really Killing Your Credit?” a hard pull could reduce your credit score by a few points, but it’s not the end of the world. As long as you keep your inquiries to a minimum, it shouldn’t present much of a problem. It’s when you have several recent inquiries on your credit report that you start to look like you are desperate for credit and you may get denied by lenders.
However, as we discussed earlier, the more significant potential impact to your credit score is the decrease in your utilization ratio if you do get approved for a credit line increase. Since utilization makes up about 30% of a credit score, improving that factor could benefit your score and would likely outweigh the impact resulting from a hard inquiry.
What Are the Downsides to Increasing Your Credit Limit?
Besides the impact on your credit score of potentially getting a hard inquiry, there are a few other drawbacks to consider when increasing your credit limit.
Some credit card issuers may charge sneaky fees to increase your credit limit. If you don’t want to pay a fee, make sure to check the terms of your card before requesting a credit line increase.
In addition, having access to more credit could encourage you to spend more, which could end up doing more harm than good to your credit score and to your overall financial health.
Other Ways to Increase Your Credit Limit
If you can’t get a credit line increase on an existing card, you can open a new credit card.
You don’t necessarily have to ask for a credit line increase if you want to get a higher credit limit.
Another option is to transfer some or all of your credit limit from another credit card to the card you want to extend. However, with this method, the two cards need to be from the same bank, and not all banks allow customers to do this.
If your bank does allow credit limit transfers, you could open a new credit card with them, take advantage of any signup bonuses offered, and then transfer the limit to your older card.
If transferring is not an option, opening up a new credit card with any bank will still increase your overall credit limit and utilization ratio, assuming you do not run up a balance on the card.
Have you tried requesting a credit limit increase before? Which of these methods do you plan to try next? Let us know in the comments below!
If you have credit cards with low credit limits, you may be interested in increasing your credit limit. In this article, we’ll talk about why your credit limit is important, reasons to increase your credit limit, when and how to request a credit line increase, and more. Keep reading for everything you need to know about how to increase your credit limit.
