When to Ask for a Credit Limit Increase
By Eva Norlyk Smith Ph.D.
March 23, 2012
I have one credit card, which I use for major purchases. My credit limit is $3,000. My balance is $500 (from plane tickets I bought in January). I'm working on paying it down and, in general, I pay off my balance each month — I just got caught up with some car repairs last month and ended up not being able to cover the cost of the tickets.
I've heard that raising my credit limit will help my credit score — because then the debt I have will be a smaller percent of the credit line. Do you think my bank would let me raise my limit when I've got $500 in debt? And how do I request an increase from my bank? Do I just call up and ask them? Last time I checked, my score was 700, by the way. I just want to bump up my score as far as I can because I'm going to be financing a car soon. — Carl
Great question. You're touching on one of the simplest ways to boost one's credit score: keeping the credit utilization on the card low.
Credit utilization, also referred to as the debt-to-credit ratio, is a measure of how much of your available credit you're using. It contributes a full 30 percent to FICO scores. So yes, you're right, keeping one's credit card debt low in relation to the limit can have a powerful impact on credit scores.
Is your current debt level a concern? The way to determine that is to calculate your credit utilization ratio. With a $500 balance, your debt-to-credit ratio is 500 divided by3,000. Do the math (divide 500 by 3,000, and multiply by 100 to get the percentage), and you'll find that you're using up 16.67 percent of your current credit line.
While many experts recommend keeping credit utilization below 10 percent to get top credit scores, a 16.67 percent credit utilization is very good. Credit utilization really begins to pull down scores if it gets above 30 percent of the available credit.
In terms of your overall question, yes, it's always a good idea to increase one's credit limit over time. However, this may not be the best time for you to ask for a limit increase. You're better off waiting till you've paid down the current balance. You also need to factor in how long you've had your credit card. Card issuers generally want to see at least a one year of payment history before considering credit line increases.
When you get ready to ask for a credit limit increase, it's fairly straightforward: Simply call a customer service rep to ask. Do phrase your question in terms of your ongoing efforts to improve your credit score — it's important to not appear as if you need additional credit.
There are two ways card issuers consider requests for credit limit increases. If the cardholder has a long history of regular payments, the customer service rep might be able to automatically approve you for a credit limit increase. In other cases, the rep will ask for permission to pull your credit report before giving a reply. Generally speaking, each time a creditor pulls your credit report, it lowers your credit score slightly, so this may not be your best option if you're about to apply for a car loan. However, the effects of a single credit report pull are short-lived, so if you wait three to five months, your score should bounce back.
If your primary goal is to boost your credit score, however, there may be other actions that will yield better results. For someone who has had a history of paying on time, like you do, and usually pays off the credit card balance each month, your score should be higher. While a FICO score of 700 is good, to get the best interest rates on a car loan, you will want to get above 720 or even 740.
I suggest that you pull your credit score again, and if it's still around 700, there are likely other factors affecting it. For example, if you've only used credit for a short while (less than five years), that will have an effect. Similarly, using only one one credit card could be a factor — credit scoring models reward people who show they can manage many different types of credit responsibly. So if you have only one credit card, consider applying for one more to expand your credit mix (this will also result in a temporary dip in your score due to the credit report pull from the new issuer).
Once you take out a car loan, that should actually help boost your score (assuming you make payments on time), because it improves your credit mix.
As you can tell, there are many components to building excellent credit, and reaching top scores takes time. The good news is that you're dong the most important thing to achieve that long-term goal — educating yourself on establishing good credit and planning ahead to take those steps.