What to know when you are offered a credit limit increase

Credit limit increases are often touted as a way to improve your credit score. Because a large portion of your score is determined by how much of your credit limit you are using at any given time, the idea is that having a higher limit will lower your credit utilization rate. .

If you have an initial limit of $ 2,000 and put $ 1,000 on your card, your usage rate is 50%. If your limit is increased to $ 4,000 and you still spend $ 1,000, your usage rate drops to 25%.

In turn, your credit score could increase over time, giving you better interest rates and access to better financial products, like rewards for credit cards, mortgages and even home rentals or apartment. Most experts recommend keeping your rate at 30% or less to maximize your score.

The problem is, a higher credit limit isn’t always a good thing. When a person’s credit limit increases, the amount of credit they use and the amount of credit card debt they carry usually increases in tandem. This means that you risk getting into more debt and paying more interest to the credit card company every month.

This is according to research by Scott Fulford and Scott Schuh of the Federal Reserve Bank of Boston, who found that “credit card debt changes almost in proportion to credit and at about the same time, so that the fraction of credit used is relatively stable over time “. In other words, if you have a limit of $ 5,000 and a debt of $ 2,000, you are likely to spend more and increase your debt to $ 4,000 if your limit is doubled to $ 10,000.

This research was conducted by Elena Botella, a former Capital One employee who recently wrote about the company’s suspicious credit card practices for The New Republic.

While an increase in the credit limit may seem dangerous to someone already struggling with credit card debt, a higher limit may be needed for some people to make ends meet, Make It told CNBC. , Ted Rossman, Industry Analyst at Creditcards.com. While it’s ideal not to have credit card debt, “of course, that doesn’t happen” for a lot of people, he says. America is a consumer debt society.

“In the abstract, a higher credit limit should improve your credit score because it will lower your credit utilization rate as long as the amount you owe stays constant or goes down,” says Rossman. But, “If there is a chance that you will see a higher credit limit as an excuse to take on more debt, you should avoid it.” “

Matt Schulz, chief industry analyst at CompareCards.com, agrees the situation is complicated.

“If you have credit card debt, getting your credit line increased can be like making the hole in the bottom of a sinking boat bigger instead of working for the butcher,” Schulz told CNBC. Make It. “If you think your debt is out of control and that a higher limit would just cause you to spend more, you absolutely shouldn’t get one.”

That said, managing a credit limit increase “wisely” can help in tough situations.

“If you’re about to run out of credit cards, increasing your credit limit can give you some financial wiggle room in an emergency,” Schulz said.

And if you use it to increase your score – by keeping your usage low, as detailed above – it could help you qualify “for things that can help you better control this debt,” such as a 0% balance transfer card.

Still, Schulz says the best thing you can do is educate yourself on the pros and cons of all the credit tools available to you to make an informed decision that’s right for you.

“At the end of the day, you have to know yourself and know what risk you are willing to take,” he says. “Pro tip: If you’re in debt and someone is trying to sell you the benefits of a higher credit limit without also exposing the risks involved, take your business elsewhere. This person does not have your best interests in mind. “

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