I don’t know about you, but it seems like I can’t go a week without someone asking me if I want a credit limit increase. Every time I use an ATM or go into a bank branch, I get asked if I want to take advantage of my pre-approved credit limit increase. When I’m doing online banking, as soon as I log in, I’m asked if I want to increase my credit limit. I get physical mail to see if I’m interested in accepting a credit limit increase and I even get calls about it on a regular basis.
I get it, I’m pre-approved for a credit limit increase and all I need to say is yes to get the process started. What’s interesting about these credit limit increase offers is that it comes from just about everyone. I get the offer from all of my credit card providers and my banks. I’m sure I’m not alone with these constant offers and I suspect that many people are wondering if they should accept a credit limit increase and how it’ll affect them? Well, here’s what you need to know before saying yes to a credit limit increase.
It may affect your credit score
Even if you’ve already been pre-approved for a credit limit increase, your credit score may still be affected if you agree to take it. Some lenders will do one final check to your credit score when you request that increased credit limit, but not everyone. If they do a check, your credit score will go down 10 points. This isn’t a big deal in the grand scheme of things as it’ll go back up after you make your payments on time after a few months.
On the flip side of things, getting a credit limit increase can actually improve your credit score since your credit utilization ratio would decrease. Let’s say you have a total credit limit of $3,000 and you normally carry a balance of $2,000 (which you pay off every month), that means your credit utilization ratio is 66%. Now let’s say you’re approved and accept a credit limit increase of $2,000 so the total credit available to you is now $5,000. Your credit utilization ratio would now only be 40% which looks better since you’re not using as much credit available to you. In case you’re curious, you can check your credit score for free at any time with Borrowell.
It’s not a bad thing to say yes
If you’re responsible with your spending, then there’s nothing wrong with getting a credit limit increase. I personally think it helps you since it gives you more purchasing power. For example, whenever I travel, I typically charge all my expenses to my credit card. Since I’m married, I’m paying for two people so my costs can add up quickly. This isn’t a big deal, but one year when I was at the San Francisco airport picking up my rental car, I didn’t have enough available on my credit card to pay for the rental. I immediately called my credit card company who approved my credit limit increase so I could complete the transaction.
Before this incident, I always tried to keep my credit limit down, but I quickly realized that having a much larger limit is handy. Insurance, new computers, hotel reservations and many other things easily can run into the four digits which is why you want to have that extra credit available.
Your spending may increase
Even though accepting a credit limit increase may not be a bad thing, for some people it could be a terrible idea. I’m referring to people who have a tendency to spend without any real plan to pay off those new charges. It’s not totally uncommon for someone to get a credit card limit increase and then immediately start charging more to their card since they have more buying power. If you’re the type of person who has serious FOMO issues, then say no to the credit limit increase.
The marketing behind credit limit increases can also affect the way you spend. Quite often banks suggest using a line of credit limit increase to fund expenses such as a home renovation or taking a trip. Yes, the current interest rates are pretty low, but you’re still borrowing money to pay for something. Just because you have an increased credit limit doesn’t mean you can all of a sudden afford more things.
You could still be denied even if you’re pre-approved
What’s annoying about these credit limit increase offers is that you’re not always guaranteed to get it. If you read the wording of the offers, it’s usually something along the lines of “you may be approved for a credit limit increase.” Even when the wording says you’re already pre-approved, lenders may still do a credit score check as mentioned above. If your credit score is low by their standards, they may end up declining that credit limit increase that they spent so much time trying to get you to say yes to.
Sticking to one credit provider may work against you
Instead of saying yes to the credit limit increase offered by your current credit provider, it may make sense to apply for a new credit card instead. In my opinion, it always makes sense to have multiple credit products. For example, I shop at Costco and No Frills a lot where they only accept Mastercard whereas my main credit card is an American Express. Having a high credit limit doesn’t help me if I can’t use my card at some merchants.
Another reason having multiple credit cards is a good idea is that you can take advantage of any current sign up bonuses. If your reason for taking a credit limit increase is so that you can charge a major purchase to your card, you’re better off applying for one of the best travel credit cards in Canada or one of the best cash back credit cards in Canada. These cards can easily have a welcome bonus worth more than $250 so it’s worth your while to apply.