How the request for a credit limit increase affects credit
We live in a world where it seems more is always better. While this can be true most of the time and for most things, when it comes to credit limits, there are a few things you need to know. Let’s take a look at credit limit increases and see what they can mean for you and your credit score.
How does a request for a credit limit increase affect your score?
It all depends on how the request is initiated. Most lenders have a mechanism for requesting line of credit increases; some will even take effect automatically if you follow certain guidelines set out by the lender. In these cases, a limited or “soft” investigation is usually done by your lender, which, as we saw earlier in this space, will have no effect on your credit score.
However, if the increase is not automatic and you request it, some lenders may make a “hard” investigation. This could reduce your score by a few points (probably no more than 10) and the effect will likely be short-lived. But the claim will stay on your credit reports for two years. If you are concerned about the impact of a hard pull on your score, consider asking the credit issuer if a smaller increase request can be considered as part of a soft pull.
The good news is that if you get an automatic increase or if your application is accepted, your credit usage will decrease. This will serve to increase your score, as usage represents 30% of your overall FICO score. This assumes, however, that you are not going to load a storm right away with your new raise.
But there is no free meal as they say. Applying for new credit may trigger a drop in the “new credit” portion of your FICO score, which is worth 10% of your score. However, given the disparate weighting of the two factors, you should ultimately come out the winner.
As for the bad news, it is surprisingly modest. If your request is denied and you don’t get any increases, the effect of a hard pull should only be a few points and shouldn’t have an effect on your score for more than a month or two.
When should I request a credit limit increase?
In much of life, timing is everything. In credit, this is particularly true. If you want to plan your application to maximize the chances of success, I suggest you ask for an increase if something positive has happened since you got your card, like an increase in your household income, a decrease in your debt or an increase in your credit score. .
Conversely, I am not suggesting that you apply if any of the following have occurred: you have lost your job or suffered a drop in income; your credit score has declined; you are at or near (or even above) your credit limit; you recently missed a payment or paid less than the minimum; or you recently added a new credit.
Generally, after six to 12 months of one-time payments, you may be eligible for a raise. You must ensure that these payments have been greater than the minimum required. Your current account usage will also likely factor into the decision, so try to keep your percentage at 30% or less to increase your chances of being approved for a raise. These actions demonstrate responsible use of the credit you already have.
Just like accessing new credits, you want to limit your requests in this area. Too many requests can indicate that you are about to spend a spree. You might be turned down and if a serious investigation were made, the blow you would get might be more felt.
Many requests for credit or a credit increase are never a good idea; the only time a lot of demands won’t hurt you is if you’re looking for an expensive item, like a mortgage or a loan for a new car. (In this case, try to group your rate purchases over a short period of time so that multiple requests count as one request.) You should be aware that too many credit card or line of credit increase requests are like a red flag to rating experts.
Should I increase my credit limit if it is offered?
If it is offered, it is likely that your credit has not been accessed in a way that will hurt you and an increase will help your usage score. However, if you think a raise might be too tempting and result in overspending (now you can get that big screen TV you covet), you might want to think twice. This is a question that only you can answer, but it is important. Most of you know this, but for those who don’t, more credit doesn’t mean more income. It’s just another way to spend the money you’ve already budgeted for.
How to increase your credit limit without hurting your score
As stated earlier, most lenders have a mechanism for requesting an increase. This can usually be done over the phone or over the Internet. Your lender will want you to provide us with information to review your request, whether or not an effort is made. This will include your current income and employment information. You can ask if a hard pull will be performed and, as previously discussed, if this can be avoided at a lower increase threshold. I suggest you always ask for your own information.
Before making decisions like this, I also suggest that you check your credit reports for yourself. You can do this for free at AnnualCreditReport.com; reports from the three bureaus (Equifax, Experian and TransUnion) are available weekly through April 2021 due to the COVID-19 pandemic. This service is usually only available once a year (hence the nickname “annual credit report”).
As with any new credit, this is a step I always recommend doing so you know what’s on your reports. This will benefit you by giving you time to correct any mistakes you find and make sure your credit is in tip top shape.
Have a question about Steve’s credit score? Drop him a line on the Ask Bankrate Experts page.