At the start of the pandemic, many credit users were shocked to realize that their credit scores had dropped without warning. The drops had nothing to do with how they were managing their credit card debt. Instead, they were caused by credit card companies decreasing customers’ credit limits without notice. The practice is more common than you might think.
During economic downturns, people often rely on credit cards to pay outstanding bills and maintain their standard of living, especially if they’re dealing with unemployment or a loss of income. However, credit card companies will lower limits to protect themselves from customers who may not be able to pay. It’s a Catch 22, that right when you need higher limits and a strong credit score the most, your creditors cut that lifeline back.
Between 2019 and 2020, the average American’s total credit limit decreased by $1,005. The good news is that if you’re one of the credit users that had your limits cut, there are steps you can take to get them back.
At the same time, it’s worth understanding why the credit card companies cut your limits in the first place, and what you could be risking by asking for a higher limit. This guide will explain both.
Table of Contents:
What is a credit limit?
A credit limit refers to the maximum amount a consumer can charge on a revolving credit account, like a credit card. Each time you use a credit card for a purchase, it subtracts from your credit limit. The remaining total is referred to as your available credit balance.
It’s important to understand the difference between credit limits and available credit balances. Your available credit changes frequently—as you make charges it goes down and as you make payments it goes up.
By contrast, credit limits change much less frequently.
How are credit limits determined?
Credit limits are set by credit card companies. There are five factors that affect what limit a credit card company will offer you. The last factor only comes into play with secured credit cards.
1. Your credit score
For starters, companies will look at your credit score before deciding you are a good candidate for a revolving credit line, like a credit card.
A higher credit score shows you are more responsible with credit. Thus, the creditor will grant you a higher limit. A lower score means more risk for the creditor, which means a lower limit for you.
2. Your income
When you apply for a credit card, the creditor or bank will ask about your income. Part of the reason is that a higher annual income will usually equate to a higher credit limit.
Creditors will also routinely ask you to update the income listed in your account. Doing so anytime you increase your income can help you get credit limit increases on your cards.
3. The economy
Economic conditions that are completely out of your control also affect your limits. Creditors increase limits and offer higher limits on new cards when the economy is good. Then they decrease limits and offer lower limits on new cards when times are tough.
During the pandemic, credit card limits were decreased, especially on cards that were inactive or hardly used. The theory is that if you weren’t using your card regularly before an economic downturn, that you’d only run up a balance after because you were in dire financial straits.
3. Your history as a customer
When it comes to existing accounts and credit limits, if you keep your account in good standing, the creditor may increase your limit without your knowledge. A bank or credit card company may do so if you are a good customer that pays your bills on time and uses the account responsibly.
In some cases, they may also ask you if you want the credit limit increased. You can decide to accept it and get a higher limit or decline it and keep your limit where it is.
Conversely, if you’ve had issues with your account, you could face a limit cut. Credit card companies are not required by law to give you advance notice when they cut your limit.
4. The size of your cash deposit
With secured cards, the size of your cash deposit determines your credit limit because it acts as collateral for the lender. So, the sum of your deposit becomes your available credit limit.
However, a creditor may increase your credit limit of their own volition should you continue making on-time payments. Otherwise, adding to your security deposit would be the way to increase your credit limit.
How credit limits impact your credit score
Credit utilization plays a very important role for consumer credit scoring models. Both your overall credit utilization and utilization per card affect your credit scores. Experts recommend keeping your credit utilization ratio – which is your total debt divided by your total credit limit – under 30% overall and per card.
For example, let’s say you currently have three credit cards that have a total credit limit of $15,000 combined. Each card also has a credit limit of $5,000. If your total current balance between all three credit cards is $4,500, you are in the correct 30% ratio. However, if only one of your cards retains the total $4,500 balance while the other two remain unused, then your credit score may suffer.
Then again, increasing credit limits can help you improve your credit score. How? When your credit limit increases, your credit utilization conversely lessens. So, it may be a good idea to get a credit limit increase to improve your score as long as you can manage the debt.
For example, if you have a current credit limit of $1,000 and your balance is $500, your credit utilization ratio would be 50%. Now, assume you get a $700 credit limit increase. This will cause your credit utilization to drop from 50% to 29%. As a result, your credit score will jump up a few points.
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How to raise your credit limit
To raise your credit limit, you simply need to ask the credit card company for an increase. You simply call their customer service line and ask the credit card company representative to raise your credit limit.
That being said, you want to make sure that you’re in the right position to get the request approved. Asking for an increase at the right time can improve your chances.
When should you raise your credit limit?
Though a credit limit can increase spending flexibility while lowering credit utilization ratios, it should only be considered at the appropriate time.
So, when is the right time? Ask yourself these questions…
Why do I want a higher credit limit?
If you’re considering asking for a higher credit limit on a credit card, it’s a good idea to check in with yourself on your reasons for wanting a higher credit limit and your ability to manage credit card debt.
Do you want to lower your credit utilization rate, the ratio of your overall revolving credit debt to available credit? A higher credit limit can help. However, you could also achieve a lower credit utilization ratio by paying down the credit card debt you currently have.
How much of a credit limit increase should I request?
Asking your credit card issuer to raise your limit from $3,000 to $6,000 probably isn’t wise, since requesting such a huge increase could set off alarm bells warning the credit card company of desperate financial times in your household.
Ask for a smaller, realistic increase instead. Some credit card companies may allow you to specify and amount while others will choose the amount for which you qualify.
How will a hard inquiry affect my credit score?
When you ask for a credit limit increase, your credit card company will pull your credit report to check your credit score, payment history and credit utilization rate. That action is known as a “hard inquiry” and may lower your score a few points for a short period but won’t affect your score long-term.
However, if you’ve applied for several credit cards or loans in a short period recently, another hard inquiry could have more of an impact on lowering your score.
Has my credit score improved since I opened the card?
One good reason to ask for a credit limit increase is if you now have a higher credit score than when you applied for the credit card.
For example, if your FICO score was in the “good” (670-739) range a few years ago when you opened the card and your score is now in the “exceptional” (800+) range, you probably have a better chance of receiving a credit limit increase.
However, factors also could influence approval. For instance, if a few of your credit cards are maxed out, that could work against approval for an increased credit limit.
How well do I manage credit card debt?
Do you want the increase so you can purchase an expensive appliance or travel? If so, be honest with yourself about your ability to manage debt before opening the door to managing more credit card debt.
Should I go online or pick up the phone?
Depending on the credit card company, you may be able to apply for a credit limit increase online. However, if you call your credit card company to make the request with a representative, you’ll have a better opportunity to make your case.
It’s a lot easier to reject a request online than when you’re talking on the phone with a person. Even if you anticipate a long hold time, consider getting on the phone to ask for a higher credit limit.
Can I be nice for 30 minutes?
As cranky and tired as you may be struggling with debt, make sure you’re courteous, kind, and patient with the person answering the phone when you request your credit limit increase. Chances are, a lot of irritable, anxious, and rude people call him or her all day long.
You’ll have a better chance of winning a receptive ear if you politely make your case and recognize that these are stressful times for all of us, including the credit card company’s representative.
The risk of higher credit limits
There are plenty of benefits with higher credit limits, but what hardly anyone ever considers are the downsides. If your debt is weighing you down, a credit limit increase may not be in your best interest. If you’re living paycheck-to-paycheck and using credit to cover daily expenses, a higher limit just means you’re able to fall deeper into debt.
And yes, your credit score may jump up because of the increase, but this is only a temporary fix. Once new charges push you over 30% utilization again, your credit score will take a nosedive. And if you cannot keep up with your payments, the damage will worsen.
So, if you do not have a healthy spending budget, you will run up your credit balances and fall deeper down the debt rabbit hole. And the deeper it gets, the harder it becomes to crawl back out.
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Credit limit FAQ
Q:What happens if you go over your credit limit?
Beware that though your charge might go through, you would likely get hit with over-limit fees. You may also face higher interest rates or a lower credit limit. You might even see your credit score drop because of an increased balance. And if you make too many over-limit charges, your credit card company may just close your credit account.
Q:How much of your credit limit should you use?
Q:How often do credit card companies increase limits?
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Article last modified on March 15, 2023. Published by Debt.com, LLC