Will increasing my credit limit help my score?

Will Increasing Your Credit Limit Help Your Credit Score?

The short answer is: It can. Increasing your credit limit can positively impact your credit score, but it’s not a guaranteed magic bullet. The key factor lies in how it affects your credit utilization ratio.

Your credit utilization ratio is the percentage of your available credit that you’re currently using. It’s calculated by dividing your total outstanding balances by your total credit limits. For example, if you have a credit card with a $1,000 limit and a balance of $300, your utilization ratio on that card is 30%. If you have multiple cards, the ratio is calculated across all of them.

Credit utilization is a significant factor in your credit score, second only to payment history. A lower utilization ratio generally translates to a better score. Why? Because it suggests to lenders that you’re managing your credit responsibly and not overextending yourself.

So, how does increasing your credit limit help? By increasing your available credit, you effectively lower your utilization ratio (assuming your spending remains the same). For instance, if you increase the limit on that $1,000 card to $2,000 while maintaining a $300 balance, your utilization drops to 15%. This lower ratio can signal to credit bureaus that you’re a lower credit risk, potentially boosting your score.

However, there’s a small caveat. When you request a credit limit increase, your card issuer might perform a hard inquiry on your credit report. A hard inquiry is a formal check of your credit history and can cause a small, temporary dip in your score (typically a few points). But the potential positive impact of a lower utilization ratio typically outweighs this minor dip within a few statement cycles, especially if you’re diligent about keeping your balances low.

It’s important to remember that increasing your credit limit isn’t a license to spend more. If you increase your spending along with your limit, you might negate the positive impact on your utilization ratio and even find yourself in deeper debt. The real benefit comes from maintaining responsible spending habits while enjoying the advantage of a lower utilization percentage.

Therefore, increasing your credit limit can be a beneficial move for your credit score, particularly if you’re currently carrying balances close to your limits. However, it’s crucial to use this tool responsibly and avoid the temptation to increase spending. Focus on keeping your balances low and making timely payments, and you’ll be well on your way to a healthier credit profile.