In a world where your credit score may affect everything from your home loan to car insurance rates, it is no surprise that everyone is looking for that quick fix to bump their score a few points. Although major improvements in credit take several months (and sometimes years) of responsible credit usage and money management, some personal finance blogs recommend raising your credit limit.
Although the exact calculation for credit scores is unknown, FICO released a breakdown and the second largest aspect is amounts owed. This is more than just the bottom line on your statement, they want to know your utilization rate. Your utilization rate is essentially how much debt you have compared to how much debt you could have.
Most of the major credit bureaus are looking for this utilization rate to be somewhere around or below 30 percent. The mindset behind raising your credit limit is to lower your utilization rate and thereby increase your score. But before you apply for a thousand dollar increase on all of your cards, check out some of these catches that may end up hurting your score.
New credit comprises an estimated 10 percent role in your score. Because new credit includes any hard credit checks, a lot of inquiries will negatively impact your score. Not to say that one credit inquiry will counterbalance the positive effect of raising your credit limit, but it is something to keep in mind before you have several companies check your credit. It is also important to remember that new credit inquiries only stay on your report for 2 years, significantly less time than other aspects like payment history and bankruptcy.
Decreases in your score due to a credit inquiry will be outweighed by a lower utilization rate, but you need to consider what happens if your request is denied. For this reason, only apply for a limit increase if you are confident your payment history will warrant one. If you’re in a position where a few points are making all the difference, don’t get hit with a denial and have to eat the negative effects of an inquiry.
Beyond all else, consider how a higher limit may be tempting if you have a tendency to overspend. You may be better off keeping that card hidden away and paying off the balance to raise your score than you would be to get a limit increase and then turn around and spend more.
The rule of thumb with this credit-boosting technique is like all the rest, there are positives and negatives for every individual situation, but be sure to consider the whole picture rather than jump on the newest trend on how to raise your score.