4 steps to increase your credit limit for the holidays
By Erica Sandberg
November 21, 2014
If my only credit card is rejected for not having enough available credit for what I buy at the store, but I pay on time, can I still buy something by having the credit card company up my credit limit? Christmas is coming. –Jessica
Let's examine what's going on here. You would like to use your sole card for your holiday shopping needs, yet you already owe quite a lot on the account. By being at or near the charging limit — otherwise referred to as the credit limit — the creditor won't allow you to add much more, at this stage, anyway.
Unless you have a charge card (which allows cardholders to borrow just about any amount, as long as they repay the balance in full within about 30 days), credit cards come with a limit of how much you can charge (or borrow). Some are as small as a couple of hundred dollars, while others are deep into the thousands. Upon approval, the credit issuer determines what that limit is. That figure is based on the product itself as well as your income and credit history. In general, the more money you earn and the better the credit rating you've built up, the more money they will let you borrow.
However, that charging amount can change in either direction based on your performance with that account. For example, if you've used the card regularly for at least a year, while paying on time and maintaining a low balance, the card issuer may increase your credit line. In fact, you may not even have to ask. You'll just get a letter in the mail explaining that you've been bumped up to the next charging level.
Conversely, if you've missed a few due dates or get into deep debt that you never seem to work down, the issuer could decide to pull back and shorten the spending reins, as your actions could indicate financial trouble, making you a credit risk. And sometimes a creditor may reduce a credit line because of outside factors that have nothing to do with your behavior, such as data theft or internal business decisions.
When used correctly, cards are easy, safe payment tools. Just know what you can afford to spend, then pay off the entire accumulated balance when you receive the bill. With this method you'll never pay finance fees on revolving debt, and if you have a rewards program, you'll come out ahead with cash back or points tradable for stuff. Additionally, your credit rating will improve, increasing your eligibility for accounts with higher credit limits and even better perks.
Now for the reality. You have one card that seems to be maxed out, or close to it. Not only will that prevent you from adding more to the card, but your credit scores are being negatively impacted. Credit utilization is the second most important factor in the most common credit score, FICO. That means you want to keep your balance under 30 percent of your credit limit. So, if you have a $1,000 limit, you don't want to carry over more than $300 each month. (Incidentally, payment history is the most important factor with FICO, and you can keep that in good standing by paying your bills on time.)
So this is what I want you to do, in this order:
- Find out what your credit limit is. Many people don't know, so if you're among them, just check your physical or online statement. It will be there, usually at the top.
- Scroll down to see your current balance, then compute your utilization ratio.
- Pay the balance to 30 percent of the limit. Less is best, though, so shoot for zero if you can.
- Call the creditor to request a larger limit. You might need more borrowing ability for everything on your Christmas list and beyond. By proving that you can manage the original credit line, the issuer may be happy to expand it.
Follow these rules and you'll not only have a happy holiday, but will be debt-free in the new year!
Got a question for Erica? Send her an email.