A credit card gives you more choices. These cards increase a consumer’s purchasing power, can improve your credit score, and usually have rewards programs. There’s a lot to dive into once you get a credit card, but your credit limit is an important number to keep in mind. Your credit limit impacts your purchasing power and credit score. Understanding how this number influences your financials can help you make better decisions with your credit card and improve your score.
What is a Credit Limit?
Your credit limit measures how much debt you can rack up on your credit card before the credit card company steps in. Some issuers will cancel transactions that would take you above your credit limit, while others let the purchase go through but charge an over-limit fee. Even if you have exceeded your credit limit, interest and fees can still increase your total credit card balance.
How Does a Credit Limit Work?
Each time you buy something on your credit card, the transaction shows up on your balance. The gap between your balance and credit limit reveals your spending power. For example, a consumer with a $1,000 credit card balance and a $4,000 credit limit has $3,000 in purchasing power. You can increase your purchasing power by paying off debt or requesting a higher credit limit.
What Determines Your Credit Limit?
If you use a secured credit card, the security deposit becomes your credit limit. However, it’s a little more complicated for unsecured cards. Credit card issuers will start you off with a low credit limit. Then, issuers will pay attention to your payment history, credit utilization, income, and a few other factors to assess your credit limit. If you improve your finances, issuers will raise your score over time. You can ask for a higher credit limit to expedite the process, but some credit card issuers raise your limit even if you don’t ask.
Should You Request a Credit Limit Increase?
Some cards will automatically raise your credit limit based on your history, but if you want a higher credit limit, you can request it. Before fulfilling your request, an issuer will initiate a hard credit inquiry. This credit check gives the creditor a detailed snapshot of your finances and ability to manage debt. In addition, a higher credit limit has several advantages over a lower limit. Therefore, it can be a good idea to request a higher credit limit.
Does a Credit Limit Increase Request Hurt Your Score
Yes, but it’s easy to recover. Most credit card issuers will conduct a hard credit inquiry to determine your new credit limit. Your score may drop a few points, but it only takes a few months to recover. If you don’t see yourself applying for important loans such as a mortgage or auto loan, requesting a credit limit can make sense. You will have more than enough time to regain ground with your credit score. Hard credit checks only become problematic if you apply for a flurry of loans and credit cards over an extended period of time.
The Advantages of a Higher Credit Limit
Why do people request higher credit limits even though their scores will go down by a few points? The long-term advantages of a higher credit limit outweigh the small and short-term credit score drop.
Boosts Your Purchasing Power
A higher credit limit extends your card’s purchasing power. You can make more purchases before worrying about hitting your limit. It’s best to avoid approaching your limit, as you will avoid interest and save a lot of money in the long run. Some people increase their spending in correlation to increasing their credit limit, a recipe that can result in more debt. However, it’s good to know that your card can handle the additional expenses if necessary.
Better Credit Utilization
Your credit utilization is the second most important component of your credit score, making up 30% of your FICO score. Credit utilization measures how much money you have borrowed against your credit limit based on a percentage. For example, if you have borrowed $1,000 against a $2,000 credit limit, you have a 50% credit utilization ratio. This isn’t a good ratio for your credit score and will keep it down. A 30% credit utilization ratio can improve your score, but it’s optimal to keep this number below 10%.
Borrowing $1,000 against a $2,000 credit limit can hurt your score. However, raising your credit limit to $5,000 will help your score. The credit limit increase reduces your credit utilization ratio from an excessive 50% to a healthier 20%. Your credit utilization ratio turns from a liability to an asset for your credit score. A consumer in this scenario achieves this change without having to pay off any credit card debt, but trimming it would be beneficial.
More Advantageous Terms
Most people take out several loans in their lifetimes. Mortgages, auto loans, and personal loans are some of the top choices. Each of those loans has an interest rate and terms that impact how much you spend over the loan’s duration. A higher credit limit can improve your credit score by bolstering your credit utilization ratio. While you won’t see gains right away, the gradual credit score growth can help you qualify for better loans and secure lower interest rates. Getting a lower rate on your mortgage or auto loan can save you thousands of dollars over the life of the loan.
Opens More Opportunities
Not only will you get better terms, but you will also have more loans and financial products available. Many lenders have credit score requirements for their financial products. You can’t get a conventional mortgage unless you have a 620 credit score or higher. The minimum credit score increases if you only want to make a 3% down payment.
You can get an FHA loan even if you have a 500 credit score. It’s a useful loan for people with bad credit who want a quicker path to homeownership, but consumers can get more options with higher credit scores. You won’t feel stuck with one lender who sets higher interest rates because they know you can’t go to anyone else. A higher credit limit can add points to your credit score and open up more doors.
How to Increase Your Credit Limit
Credit cardholders score several benefits when they get higher credit limits. Sometimes, this happens automatically. However, you can expedite the process by requesting a higher credit limit. You can follow these steps to get started.
Request One Through Your Credit Provider
You can reach out to your credit provider at any time to request a credit limit increase. While a request does not guarantee your limit goes up, you can get the limit quicker by asking. The creditor will then look at your financials and payment history to determine if a credit limit hike makes sense at this time. If you don’t get the credit limit increase, you should wait a few months before making another request.
Wait for an Automatic Increase
Credit card issuers want to raise credit limits. A higher credit limit usually goes hand-in-hand with more spending, and that helps issuers collect more interest. You don’t have to become a part of this trend, but you can end up with a higher credit limit. Credit cardholders shouldn’t rely on this approach to getting a higher credit limit if they need it, but it can come as a pleasant surprise.
Practice Good Financial Habits
Credit card issuers look at your payment history when deciding how to adjust your credit limit. Having a low credit card balance, setting a budget, and living below your means are some of the paramount financial habits that can improve your credit history. Creditors will like what they see during the review process and will be more likely to increase your credit limit.
Even if you don’t get approved for a higher credit limit, good financial habits can help you make do with your current credit limit. Reducing your credit card balance gives you a more favorable credit utilization ratio and gives you more purchasing power. Good financial habits stretch beyond adding a few points to your credit score. You can manage your expenses more effectively and have less stress in your life if you apply financial best practices to your life.
Get a Card with No Credit Check
Credit cards are great for building credit and tapping into more capital, but most issuers require credit checks. This requirement can prevent people with good financials from getting credit cards. That’s because some people diligently pay off every bill without taking the time to establish lines of credit or take out loans.
If you want a card without a credit check, Grain is a great solution. Grain can sync with a debit card and give you access to a line of credit. When you pay for a good or service, Grain spots you the cash with their line of credit. Then, the funds in your checking account cover the line of credit. This backdoor makes it easier for people to build credit without worrying about hard credit checks or racking up dangerously high debt with a credit card. Grain assesses applicants based on cash flow instead of through credit. If you want a card without a credit check, you can download the Grain app today to get started.