Credit Limit Increases vs Your Credit Score
You’ve been working hard on your credit, paying on time each month and keeping your balances in check. Then you get an email notice – your credit card company offers you a credit limit increase. Sounds fantastic, but is it? What effect do credit limit increases have on a credit score?
How much of your available credit card and installment credit you use, your “debt utilization”, accounts for about 30% of your credit score. That’s a big chunk – in fact, only your payment history (whether you pay on time) affects your score more. You can estimate your debt utilization by dividing your total credit Credit Limit Increasescard balances by your total credit limits. Because a low debt utilization rate suggests that a person can use credit responsibly, a low rate usually gives you a higher credit score.
Most experts suggest keeping your debt utilization at 25% or less – that means using less than 25% of your total credit limits. But credit companies don’t only consider the usage of all your accounts together; they also look at how much you use of each individual account. So that 25% or less applies to each account as well as to the total of all your accounts.
How do you keep your debt utilization rate low?
Some suggestions are to
- Set up mobile alerts to warn you when you are nearing a pre-set spending level, less than 25% of your individual card limits
- Pay your card payments early or multiple times a month to keep revolving balances low
- Spread charges across two or three cards, so that the debt on each is less than 25%
- Accept credit limit increases, automatically decreasing the amount you owe compared to your credit limits.
Credit limit increases lower your debt utilization, but is it ever a bad idea?
Here are some instances when the answer to that may be yes:
- When a higher limit tempts you to spend more, increasing your overall debt as well as your debt utilization rate
- When you’ve added an authorized user – a child or a significant other – to your account. If he or she does not use the credit as responsibly as you had hoped, keeping your credit limit low may control financial damage.
- When you’re a co-signer on a card for someone else. In this case, if the primary borrower is at least 21 years old, the credit limit and debt utilization can be increased without your knowledge or approval.