How is your credit limit determined?
The credit card issuer determines your credit limit based on several factors, which can include your:
- Income
- Credit history
- Housing costs
- Debts
- Credit limits on any other cards you have
As you'd expect, good credit, high income, and low expenses are all factors that can help you get a higher limit.
If you're requesting a credit limit increase, then the card issuer will also look at your account history with it. That includes:
- Your record of on-time payments
- How often you use your card
- How much of your credit limit you use
Each credit card company has its own method to calculate credit limits. Since these methods are private, there's no way of knowing exactly how much a credit card company will offer until you apply for a card.
Does requesting a credit increase impact credit score?
Requesting a credit increase can impact your credit score, but only if the card issuer pulls your credit file. If the request could affect your credit, the card issuer will let you know, whether you're making the request over the phone or online.
When a credit card company pulls your credit file, it's known as a hard credit inquiry. This generally causes a small drop in your credit score. For most consumers, one hard inquiry takes fewer than five points off their FICO® Score, the most widely used type of credit score.
Not every card issuer pulls your credit report when you ask for a credit card limit increase. If yours doesn't, then your request won't have any impact on your credit.
Advantages of a higher credit limit
More buying power
With a higher credit limit, you can use your card more without the risk of maxing it out. There are several situations when this can be helpful:
- You put all your purchases on your credit card to maximize rewards.
- You want to be prepared if you have any large emergency expenses.
- You'd like to refinance credit card debt with a balance transfer, but you need additional credit to cover the balances you plan to transfer.
Can boost your credit score
You could increase your credit score by increasing your credit limit. One of the biggest factors in your credit score is your credit utilization ratio, or how close you are to your credit limits. A lower credit utilization benefits your credit score. The sweet spot is anywhere at or below 20% to 30%. (Meaning you've only used up 20% to 30% of your credit limit.)
Let's say you have a credit card with a $500 balance and a $1,000 limit. You're using half of your available credit, so your credit utilization ratio would be 50% -- which would likely ding your credit score. You ask to increase your credit limit, and the card issuer raises it to $2,000. Now, you still have a balance of $500, but your limit is higher -- so your credit utilization rate is down to 25%. That's not quite perfect, but it's much better than 50%, and your credit score would benefit.