1. Build your Credit Score
2. Reduce your Current Borrowing / EMI Costs
Picture this: you are making a routine check on your credit score, but the results are anything but routine! It shocks you that your credit score dropped out of nowhere, and you are unaware of what exactly happened or what to do next.
Given that you are here, I’m guessing you are looking for an answer to a similar predicament.
Well, the drop in your credit score could be the result of several reasons; one of them being a high credit utilization rate. If that is in fact the case, increasing your credit limit can definitely help push your credit score forward.
The credit limit is the absolute maximum outstanding amount that your credit card issuer lets you borrow. Every time you purchase with your credit card, the purchase amount is added to your credit card balance, which cannot exceed the credit limit. Keeping your expenses well within the credit limit is vital both to avoid a debt trap and to build a good credit score.
There are three primary reasons why you may want an increase in your credit limit:
To obtain more credit for making purchases - Your existing credit limit might be too low to cover a planned purchase or an expensive gift. A higher credit limit will help you to make more purchases easily, thereby allowing you to reap the benefits of credit card reward points.
To get more credit during an emergency - An emergency in the form of anything - last-minute plane tickets home to car repairs - might knock on your door at any hour. Although you might want to use your emergency fund for every rainy day, a credit card can come in handy as well. The higher the credit limit, the more funds you can access to support yourself through a difficult situation.
To lower your credit utilization rate - Your credit score is profoundly affected by the amount owed (especially when it goes above 30% of the credit limit). The amount that you owe determines your 'credit utilization rate.' Hence, an increase in your credit limit can surely boost your credit score and take care of your financial health.
If your lender is not willing to increase your credit limit, proceed with caution. The strategy of asking upfront can backfire and eventually become the reason behind the dip in your credit score. So, plan well before you request for a higher credit limit.
The reason why a request can hurt your credit score is that the request will lead to a hard inquiry. A number of hard inquiries on your credit report might make you look desperate for credit, thereby landing a blow to your credit score. With that said, sometimes it also makes sense to request a credit limit increase. Although your credit scores might dip temporarily, it will eventually improve if you have a plan in place for prompt repayment.
Here are a few things that you should keep in mind:
Timing is key - It is always a good idea to wait until you've got a good credit track record or a stable income. As odd as it may sound, the best time to ask for more room in your credit line is when you need it the least.
Keeping your credit score stable - As discussed above, a request to raise your credit limit could initiate a series of hard inquiries on your credit report. So, avoid applying for many lines of credit all at the same time.
Evaluate the reasons before applying - Make sure that you are not asking for a higher credit limit on just a whim or impulse. The best reason to have is that you're trying to keep your credit usage low relative to your credit limit.
Your Credit Score Can Plummet - A higher credit limit can tempt you to splurge, resulting in a higher credit utilization rate. Maxing out on your credit card/(s) is much worse, and can totally derail your personal finance as your credit score drops considerably.
Lenders Might Not Approve of It - Maxing out on your credit limit could put you at risk of lenders considering you irresponsible. It might just start with rejection on your loan application, and could extend well beyond. So, try to keep your credit card expenses well under check.
You Might Fall into a Debt-Trap - Maxing out on your credit card can put you a step closer to deep debt. Although you may plan to repay the balance soon, it could take years to repay, which often leads to a vicious cycle of interest accumulation and repayment.
If you're careful and responsible with your credit card usage, there are a series of benefits to a higher credit limit. Hence, a higher credit limit boosts your purchasing power but simultaneously increases the potential risks.
Make sure that you take all relevant factors into account before deciding whether you need a credit limit increase or not. Check your credit score regularly to inform your plans, as well as to assess its effects.