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Pros and cons of increasing your credit limit

Some credit card companies waiving fees, offering perks during COVID-19 crisis
Posted at 6:36 AM, Jul 16, 2021
and last updated 2021-07-16 06:36:01-04

FARMINGTON HILLS, Mich. — Many of our mailboxes are inundated with credit card offers. Some of them from your current credit cards are about raising your credit limit.

“The whole idea of increasing your credit limit. Do you like that?” Alicia Smith asked Kavina Walker of Flint. “Yeah, yeah. It’s an awesome thing. Yeah,” replied Walker.

“I got Bank of America, and they’ve been increasing my credit limit. So, that’s been a big benefit for sure,” said David Rodriguez of Dearborn Heights.

Smith asked Rodney Ellis of Southfield if he’d be interested in a credit limit increase if offered one.

“If it’s significant, and it’s at a decent rate, definitely. I mean in business sometimes you need that extra credit here and there. So, I don’t think it’s a bad thing,” Ellis said.

I sat down with Kristen Holt – CEO of Greenpath Financial Wellness based in Farmington Hills – to get the pros and cons of saying yes to a credit limit increase.

“What should people be wary of when they get these offers in the mail?” Smith asked.

“The first thing is look at the wording of the offer. If it says ‘may be eligible,’ that is very different than a letter that says, 'We have just increased your credit limit.' ‘May be eligible’ means you more than likely are going to have to apply, and they’re going to have to pull your credit report,” Holt explained.

A con is getting a pull on your credit report. That could have a negative effect on your credit score.

So, Holt said it’s important not to allow credit checks if you’re considering buying a house or a car soon because that could potentially lower your score -- which could hurt your chances of getting a low rate for that future loan.

But one of the pros to raising your credit limit is that it could potentially improve your credit score.

Holt said 30% of your score is determined by your “Credit Utilization Ratio.”

“What that is is it’s looking at how much credit you have available, and how much you’re actually using,” Holt explained.

For example, if you have only one credit card with a credit limit of $1,000, and you have $500 in outstanding charges on that card, you’re using 50% of your credit limit.
But if you get a credit increase to $2,000 on that card, now you’re only using 25% of your available credit limit.

“A good rule of thumb – what they’re looking for really -- is for you to be using 30-percent or less – and that’s something that I think a lot of people don’t know.”

And, remember, if you do get a higher limit, that doesn’t mean you need to use all that money.

“As long as you can trust yourself, and you’re not going to take that as a license of like – ‘Oo, I have all this extra money to spend,’ getting that credit limit increase is going to be great help to your credit score,” Holt said.

That’s especially the case if the card company is not pulling your credit report, but just awarding you a higher limit based on your history as a good customer or the card company’s concern that they’re about to lose you as a customer.

Holt said another pro for taking that higher limit is it gives you an emergency cushion if you have an unexpected expense – like a car repair.

And it gives you more of an opportunity to maximize your rewards points by charging for some day-to-day expenses and earning, say, airline miles.

But no matter the pros and cons, Holt said you should make it your goal to pay off your credit card balance every month.

That way your cha-chings don’t end up having any negative dings on your credit report.

So, if you get an offer, weigh your pros and cons.
And realize that some people aren’t getting credit limit increases.

According to a recent survey by Lending Tree, nearly a third of U.S. cardholders had their credit limit cut or their account closed in the first four months of this year – about 62-million people.

And that’s in addition to the tens of millions who experienced credit limit cuts in 2020.

Sometimes card issuers will cut your credit limit if – one – you are not using the card enough or – two - the card company is concerned about its financial situation or the economy.

If you’re worried about this happening, use your card a little more, but make sure that balance doesn’t get away from you.

If it does – or if it already has -- you can get help from the non-profit Greenpath Financial Wellness.

The number to call for debt counseling is (866)648-8122 or visit greenpath.com.