Editorial Policy

Should I get a credit limit increase?

Eva Norlyk Smith Ph.D.

June 16, 2014

QDear Eva,

Capital One just offered to increase my limit by $5,000. All they want to know is how much I make. Are there any downsides to taking them up on it, or should I do it? I pay off my card every month, by the way, and my limit is already at $20,000. What do you think? –Lydia

AHi Lydia,

When someone wants to give you what looks like a great deal, keep in mind the adage: “There's no such thing as a free lunch.”

Capital One is not known to hand out credit limit increases willy-nilly, so you may want to question their motivation.

A $20,000 card limit is high enough to make most card issuers a little skittish, particularly if they don't know that much about the person holding the card. So, the offer of a $5,000 credit limit increase could in part be about rewarding you for great account behavior, but it could also be about making sure that your income is sufficient for a credit line of that size. In other words, if your current income doesn't justify the increase, Capital One may not only deny you the credit limit increase, they could lower your credit limit.Ask Eva

Think about it. For someone earning $40,000 a year, a $20,000 credit limit is high. At that level of income, it would take a long time to pay off the balance, if for some reason you had to turn to your credit card for emergency funds.

Of course, if your yearly income is high, you would likely get that $5,000 credit limit increase. But then the question is, do you really need it? Having a high credit limit can be a double-edged sword: It's a great resource, but in reality, you'd never want to run up a balance anywhere near the credit limit, because of the high interest costs.

Having a high credit limit can be a positive for your credit score, and in particular, it makes it easy to keep your debt-to-limit ratio low. Also known as credit utilization, this ratio is a measure of how much of the credit available that you use. It accounts for 30 percent of credit scores, so it has a considerable impact.

The rule of thumb is to keep credit utilization at 10 to 20 percent of the total credit limit. If you have a $2,000 credit limit, this can be an issue, because balances would have to average $400 to stay within the limit. But in your case, you can average $4,000 in credit card balance without it affecting your credit limit. Do you really need more?

In short, from a credit scoring point of view, you don't really need the credit limit increase. Unless you have a higher than average income, your best bet may be to stay put, and not take any chances of your current limit getting lowered.

Got a question for Eva? Send her an email.