When it comes to improving your credit, a lot of different strategies can help you to reach your goal. Paying your bills on time, every time is the first place you should start. Checking your three credit reports for accuracy is also important. You may be able to pay down credit card debt to bring about a positive credit score increase as well.
There are also some lesser known credit improvement strategies which might surprise you. For example, did you know that asking your credit card issuer for a credit limit increase could have the potential to give your scores a boost?
Does a Credit Limit Increase Raise Your Credit Scores?
Sometimes, yes, a simple limit increase on your credit card account can be good for your credit scores. It's true, even if it sounds to go to be so. The catch, however, is that a credit score increase is not guaranteed.
The impact which a credit limit increase has is going to depend upon other information found on your credit reports. There are some instances where a credit limit increase will not have any impact upon your scores. Other times, asking for a credit limit increase could damage your scores (albeit only slightly, if at all).
Let's walk through a few different scenarios.
1. Will a credit limit increase lower your revolving utilization ratio?
Credit scoring models like FICO and VantageScore are built so that they pay a lot of attention to the relationship between your reported credit card balances and your account limits. This relationship is known as your revolving utilization ratio.
Here is a quick example to show how revolving utilization is calculated:
Original Credit Limit: $5,000
Account Balance on Credit Report: $1,000
Revolving Utilization Ratio: $1,000 (Balance) ÷ $5,000 (Limit) = 0.20 X 100 = 20%
The lower your revolving utilization falls, the better for your credit scores. Naturally, paying off your credit card balances is probably the best way to achieve a lower revolving utilization ratio. However, if you cannot afford to pay down your credit card debt sufficiently, a credit limit increase might lower your revolving utilization some in the meantime.
Here's how it works:
Increased Credit Limit: $10,000
Account Balance on Credit Report (Same as Above): $1,000
Revolving Utilization Ratio: $1,000 (Balance) ÷ $10,000 (Limit) = 0.10 X 100 = 10%
As you can see in the example, the revolving utilization ratio was cut in half simply by increasing the credit limit on the account. This action would be likely to have a positive credit score impact.
2. Can a credit limit increase hurt your credit scores?
Generally a credit limit increase will not harm your credit scores. However, if your credit card issuer wants to check your credit report in order to review your request for a limit increase (a common requirement), a hard inquiry would be added to your credit file. If your request for a limit increase is denied (typically due to credit problems), you will have undergone a hard inquiry with no upside.
Hard inquiries have the potential to damage your credit scores. Of course, keep in mind that not every hard inquiry automatically has a damaging effect upon your scores and, even when they do, the impact is typically minor. If your request for a credit limit increase is approved and the result is a lower aggregate revolving utilization ratio, the overall result for your credit scores will still probably be positive, despite the new inquiry which will show up on one of your credit reports.
Managing Your New Credit Limit Increase
It is important to remember that while a well-managed credit card account can potentially be great for your credit scores, credit card debt is another story. Credit card debt can be both expensive and can damage your credit scores, even if you make all of your monthly payments on time.
If you request a limit increase as a strategy to help boost your scores, you will have to be extra vigilant and commit to not charge up additional credit card debt. Otherwise, or you will lose any potential for a credit score increase and you will probably throw away a lot of cold hard cash on wasteful interest fees at the same time.
Michelle Black, Founder of CreditWriter.com and HerCreditMatters.com, is a leading credit expert, author, writer, and speaker with over a decade and a half of experience in the credit industry. She is an expert on credit reporting, credit scoring, identity theft, financing, budgeting, and debt eradication. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).