How to increase your credit limit and keep a good credit score
This story was produced by Money.ca and reviewed and distributed by Stacker Media.
How to increase your credit limit and keep a good credit score
Increasing your credit limit is something that Canadians should do regularly to prepare for milestones like home ownership.
The benefits of learning how to increase your credit limit are lifelong. A higher credit limit gives you more purchasing power and the flexibility to navigate life's twists and turns.
Money.ca dives into whether you should increase your credit limit, how to stack the deck in your favour, and what to do if your bank turns a limit increase down.
Should I increase my credit limit?
A higher credit card limit means more latitude for making large purchases or managing the unexpected. Having a low credit limit can make something as simple as booking a flight seem impossible.
However, credit limit increases carry some risk.
The first danger is spending more than you have. If a bank confirms a limit increase of $2,500 to $5,000, it's easy to convince yourself that you can spend up to $2,500 more. This is the start of the slippery slope into credit card debt.
Second, when you request a credit card limit increase it typically damages your credit score temporarily. This can be demoralizing if you're not prepared.
Finally, credit limits can be deceptive. Most banks keep track of something called your credit utilization rate (sometimes called a credit utilization ratio). This is the percentage of your credit limit that you use on a monthly basis. The sweet spot is less than 30% of your maximum credit limit per month, according to the Government of Canada.
This means that with a credit limit of $2,500, you should aim for no more than $750 of purchases per month. Some lenders are even looking for a utilization rate below 10%, meaning no more than $250.
In short, banks don't like it when you max out your credit limit. They also don't like it when you don't use a card at all. Balanced spending is key.
If you struggle with overspending and impulse purchasing, try working on responsible spending or budgeting skills before asking for a credit limit increase.
What to do before requesting a credit card increase?
There are a few things you should do before requesting a credit limit increase. Keep in mind that good banks will typically only offer credit limit increases to customers that they trust to pay back what's owed.
To get started:
- Look at your credit score
- Find your credit utilization rate
- Update your credit profile
In simple terms, your credit score represents how much a bank trusts you to pay off debt. When combined with your credit utilization rate, this paints an accurate picture of your spending habits.
The last thing to do is update your credit profile by contacting your credit bureau and lender. Making sure that your credit profile is up to date means that your bank doesn't have to request an update themselves. It can also help you catch errors that may have damaged your credit report.
It also pays to plan ahead.
Banks are more likely to give you a credit limit increase when your buying power increases. Easy examples include graduating from post-secondary school, landing your first job or a big promotion at work.
Finally, note that you can only request a credit limit increase every six months. Asking more regularly can signal to a bank that you're facing significant financial strain.
What are the benefits of a higher credit card limit?
A higher credit limit can help soften unexpected financial blows, achieve key milestones in life, and provide extra leeway for things like a spontaneous vacation.
A higher credit limit also increases your target credit utilization rate. For example, having a credit limit of $10,000 means you can spend between $1,500 and $3,000 at a rate of 15% to 30%. To put this in perspective, if you put $3,000 on a card with a $5,000 limit, you would spend 60% of what's available.
When taken together, a good credit score and high credit card limit mean that banks are more likely to trust you.
In turn this can make applying for loans much easier. This trust also means that you'll likely be offered the best available rates or higher, but risk-adjusted, rates.
Being able to make larger purchases on credit is also good for fraud prevention. Banks deal with credit card fraud faster than debit card fraud. After all, whenever you use a credit card, you're using the bank's money instead of your own.
How to increase your credit card limit
Increasing your credit card limit is a simple process on paper: Just contact your bank and ask.
However, there are a few different ways of doing so. To see if you qualify for a credit card limit increase, banks need to do some due diligence. This means that there are actually two ways to ask for a credit card limit increase.
- Soft inquiries: This is when you, an employer, or a financial institution checks your credit report—sometimes as part of a pre-approval process for a loan or mortgage.
- Hard inquiries: This is when you officially fill out the paperwork for a credit card limit increase, mortgage, or car loan.
Soft inquiries are like testing the waters. They don't tend to impact your credit score. Hard inquiries show that you're officially pursuing credit and will ding your credit score by between five and 10 points.
The good news is that after a few months this swings back around.
What to do if your request is denied?
The first thing to do is take a deep breath.
As mentioned above, you should only apply for credit card limit increases every six months. This is more than enough time to change some habits. Think of this as a window to improve your credit score, reduce your credit utilization rate, pay off cards, and update your credit report.
At the end of the day, all a bank wants to know is that they can trust you to pay back what you owe.
Improve your credit utilization rate
Another way to show that you're responsible is through changes to your credit utilization rate.
This is best done as a short term solution, which makes it a perfect strategy for anyone looking to improve a credit score within six months.
Let's return to the example above using a credit card limit of $2,500. Although 30% is the sweet spot some lenders like to see, this rate is as low as 10%. This means that you only want to be putting between $250 and $750 on your credit card per month.
When coupled with a consistent credit utilization rate, a higher credit card limit both increases your spending power and can generate a higher credit score.
Alternatives to requesting a credit card increase
If you need an immediate credit card limit increase, you can also look at moving your debt around.
Spreading out your credit card purchases among multiple cards can be a short-term solution, but it carries with it long-term risks. If you have a high credit utilization rate on a single card, then using multiple cards with low ceilings can be a solution. However, this requires a higher level of money management and self-control.
You can also take advantage of promotional offers, including low annual fees or cashback rewards.
With that said, we strongly recommend addressing spending habits before spreading out your debt.
Last thoughts
All in all increasing your credit limit is a natural part of life in Canada and is something you should consider doing regularly.
If you're on the hunt for a new credit card, check out the best credit cards for Canadians with good credit or some of the best cash-back credit cards.
