Are you thinking about requesting a credit limit increase for one of your accounts? Before you put out a request, you should read this brief list of pros and cons for limit increases. It could help you make the right financial decision.
Pro: Safety Net for Emergencies
One of the biggest benefits that credit tools can offer is help with emergency expenses. When you’re facing an emergency expense that’s outside the boundaries of your budget, and you don’t have enough in your savings account to pay it off, you can always turn to a credit tool for help.
When you increase your credit limit, you’ll have more available credit that you can borrow from. This larger amount could be useful when you need to manage an unexpected expense as soon as possible.
What Credit Tools Can You Use?
You could use one of your credit cards (ideally, pick the one that happens to have the lowest balance to make repayments easier).
Or you could use a personal line of credit loan. In addition to learning about the pros and cons of credit limit increases, learn about the pros and cons of having a personal line of credit in general. This information could help you understand how to use the revolving credit tool to your benefit — and, of course, avoid any of the pitfalls that could come with its misuse.
Cons: More Temptation to Borrow
Increasing your credit limit will give you more available credit to borrow from. And if you can’t afford to repay what you borrow right away, this could be a problem. You could drastically inflate your debt load in a short amount of time. A higher debt load puts you at risk of other financial obstacles, like making late payments, maxing out your accounts or defaulting on the loan altogether.
Borrowing more credit than you can afford to repay is not a good idea. So, if you’re not sure that you can control your spending when offered more credit, don’t make the increase.
Pro: A Lower Credit Utilization Ratio
Increasing your credit limit can improve your overall credit utilization ratio. Your credit utilization ratio is the amount of credit used versus the amount of total credit that you have. The higher your total credit limit is, the lower your ratio will be.
Why is this important? Credit utilization is one of the main factors that your credit score is based on. Maintaining a lower credit utilization ratio can improve your score over time.
Con: A Hard Credit Inquiry
Requesting a credit limit increase will result in your provider performing a hard credit inquiry. A hard credit inquiry will be recorded on your credit report, and it will lower your credit score. This is technically one of the downsides of limit increases, but the downside is quite small.
A hard credit inquiry will only lower your credit score by a small fraction. It’s not a dramatic drop. And that drop is only temporary. It should go away in a year.
Plus, this damage may not happen when your provider has pre-approved you for a credit limit increase. When you’re pre-approved for a credit limit increase, your provider has already run a soft credit inquiry on you. A soft inquiry will not lower your credit score. So, if you accept a pre-approval, you might avoid this downside altogether.
So, what do you think about credit limit increases now? Do you still think an increase is worth it, or are you better off skipping the request? Pick the option that’s best for you!
