Will Asking for a Credit Limit Increase Help Your Credit Scores?

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).

Is It a Smart Idea to Consolidate Credit Card Debt?

Do you feel like your credit card debt is suffocating you? Are high interest fees taking a huge bite out of your hard-earned money every month? Are you tired of your credit scores being hurt by high credit card utilization rates? If so, the time for action is now.

Once you acknowledge that your credit card debt has gotten out of control, it is time to step back, assess the damage, and come up with a plan of action to fix the problem before it gets any worse.

Step One: Face the Facts

Now that you are ready to begin tackling your credit card debt problem, the first step is to figure out how much debt you actually have. Make a list of your credit card debt, from the card with the highest balance at the top of the list down to the card with the lowest balance at the bottom. Here is an example:

1. Capital One - $5,000
2. Chase - $3,500
3. Citibank - $2,800
4. Discover - $1,200

Step Two: Figure out How Much You Can Afford to Pay

You will still need to maintain at least the monthly minimum payment on each of your credit cards in order to do the bare minimum to protect your credit scores. However, paying the minimum payment isn’t nearly enough. If the minimum payment is all that you pay, you can count on being stuck underneath a pile of credit card debt for a long time – potentially decades!

A good place to start your debt-slashing strategy is to give your budget a good ol’ honest check up. The goal of this checkup is to find out where you may be overspending each month.

Once you have updated your monthly budget (and hopefully decided to weed out some unnecessary spending), you will be able to determine how much “extra” income you can afford to pay toward your credit card debt each month.

Oh yeah, don't forget to shelve your credit card usage so that your balances don't continue to climb during this time. Just don't close the accounts, whatever you do. That can be a big no-no for your credit scores.

Step Three: The Snowball

One option for paying off your credit card debt is the “snowball effect.” Here is how it works.

Begin by paying the minimum payment on all of the credit cards on your list, with the exception of the card with the lowest balance (#4 – Discover in the example above). For the card with the lowest balance you will want to use all of your additional funds and pay the largest payment possible.

Your goal should be to completely pay off the card with the lowest balance first. Next, move up the list to the next card with the lowest remaining balance. Rinse and repeat until every account on your list has been paid in full.

Step Four: Determine If a Consolidation Loan Is Right for You

If you find yourself in a situation where it is going to take a while to pay off your credit card debt, even using the snowball method, it may be time to consider a debt consolidation loan. Here are two great reasons why you might want to use a debt consolidation loan to help tackle credit card debt.

1. First, when you consolidate your revolving credit card accounts into an installment loan, your credit scores will likely increase.
The reason a score increase is likely is because credit scoring models, like FICO and VantageScore, do not treat installment debt the same way they treat revolving debt. A credit card with an outstanding balance has a great potential to harm your credit scores. An installment loan (like a personal loan or a vehicle loan) does not have the same negative effect.

2. The second benefit that comes along with a consolidation loan is that it has the potential to save you money.
Credit card debt is among the most expensive debt most people will ever pay. Interest rates are notoriously high compared with other loans, especially for subprime credit cards. Most debt consolidation loans have a much lower interest rate than your credit card accounts.

Step Five: Do’s and Don’t of Using Consolidation Loans

If you’ve decided that a consolidation loan is right for you, it’s also a good idea to follow these rules of thumb once you’ve decided to pull the trigger and apply for a loan of your own.

1. Don’t charge your credit cards back up once they have been paid off.

You have to determine ahead of time that you will not even allow it to be an option for you to charge up new balances on your credit cards again. This has to be non-negotiable. In fact, it would probably be a good idea for you to lock your credit cards up in a safe place and only use them about once a quarter (in order to maintain some activity on the accounts) until you have thoroughly broken the overspending habit.

2. You should still try to pay off your consolidation loan early.
Just because you consolidate your credit card payments into an installment account does not mean that you should not try to pay the loan off early. Paying extra money onto the principle balance of your consolidation loan each month is still a wise financial strategy to follow.


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, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

5 Ways You Could Accidentally Mess Up Your Mortgage Approval

Home buying can be both an exciting and simultaneously stressful process. Receiving a pre-approval letter from your mortgage loan officer can often be a huge relief. After all, a pre-approval is an important step toward purchasing the home you have been dreaming about. Yet it is important to understand that your pre-approval is not a golden ticket.

Once you are pre-approved for a mortgage, the next step is generally verification (aka underwriting). In this stage of the mortgage approval process you may be required to supply a number of documents to your lender in order to verify your income, employment history, and other information relevant to your loan. Assuming that you are able to pass successfully through the verification process your loan status should move from "pre-approved" to "approved." 

Yet just because a lender has issued you a pre-approval or even an approval does not mean you are guaranteed financing. There are still a number of ways to mess up your loan before your closing date rolls around. Keep reading for a list of 5 ways to mess up your mortgage approval. Hopefully you will be able to learn from the mistakes of others so that you never have to find yourself in the same unfortunate situation.

1. Apply for or Open New Accounts

Even though your credit was checked as part of the pre-approval process, your lender will likely check your three credit reports and scores again prior to closing. Lenders do this in order to be sure you have not experienced a change in "borrower circumstances." If credit or financial changes occur between pre-approval and closing (such as a drop in your credit scores), you could lose your loan.

Applying for or especially opening new accounts is one potential way to kill your mortgage before you ever make it to the closing table. Having your credit pulled by other lenders during this time has the potential to impact your credit scores negatively. Opening new accounts has the same credit damaging potential. Furthermore, when you open a new credit obligation while your mortgage loan is in underwriting, especially a large obligation like an auto loan, you could raise your debt-to-income (DTI) ratio as well. An increase in DTI could financially disqualify you from closing on your loan, even if your credit scores are not an issue.


2. Run Up Your Credit Card Balances

Another potential way to mess up your mortgage closing is to run up your credit card balances. As is the case with opening new accounts, when you run up higher balances on your credit cards you have the potential to both raise your DTI and to lower your credit scores simultaneously. You may not realize it, but your credit card balances have a big influence over your credit scores. As the credit card balances on your reports climb, your credit scores will generally begin to fall - sometimes significantly. In fact, the credit card balances on your reports can have a negative impact upon your credit scores even if you keep your accounts paid on time each and every month.

3. Close a Credit Card Account

When you close a current, positive credit card account that action has the potential to drive your credit scores downward as well. Closing a credit card does not cause you to lose credit for the age of the account (that is a myth), but a freshly closed account could potentially increase the revolving utilization ratios on your credit reports. When your revolving utilization ratio (the connection between your credit card limits and balances) increases, your credit scores are often impacted negatively. If your credit scores fall because of a credit card closure, there is a chance you may no longer qualify for the mortgage you had been approved for previously.

4. Pay Off a Collection

You would think that paying off old collection accounts is always a positive move when it comes to your credit scores. However, due to a deficiency in some of the older FICO credit scoring models which are still used by mortgage lenders, paying off an old collection can sometimes be interpreted as new derogatory activity. As a result, there are instances when paying off an old collection account could actually have a negative impact upon your FICO credit scores. Even if that impact is only temporary, those newly lowered credit scores could be enough to cheat you out of your home loan.

Of course you should not assume that paying legitimate old collections is necessarily a bad idea. However, if you were already approved for a mortgage with those old collections present on your credit reports then you might want to consider waiting until after your home closing before paying or settling any old accounts. (Tip: When the timing is right, it is generally best to settle collection accounts in a single, lump sum payment in order to protect yourself from being sued and to potentially save more money as well.)

5. Make Late Payments

Making late payments on any of your credit obligations while your mortgage is in the underwriting process is a huge mistake, a mistake which could easily put the brakes on your home loan. Over 15 years ago while working in the mortgage industry, I had a client who was moving from out of state to purchase a new home. During the busyness of the move he forgot to make a tiny, $15 credit card minimum payment. That late payment caused his credit scores to drop over 50 points per credit bureau on average and disqualified him from his home loan.

Thankfully, this story has a happy ending. We were able to assist the client in calling his credit card issuer to request a "goodwill removal" of the late payment. Because he had never made any previous late payments on the account his credit card issuer agreed to remove the new 30 day late from his reports as a one-time courtesy.

Once the late was removed and his credit scores rebounded the client's loan officer was able to reschedule his closing date (albeit at a slightly higher rate due to market fluctuations). Yet many people are not so fortunate when it comes to the goodwill removal of a late payment. This credit mistake has caused many people to lose their home loan altogether.

The Takeaway

Just because your three credit reports and scores were checked by your lender prior to receiving your initial pre-approval does not guarantee you the money in hand to purchase your home. Yet if you can avoid the five mistakes above you should have little to worry about, at least from a credit perspective.


About the Author: Michelle Black is an author and leading credit expert with over a decade and a half of experience in the credit industry. She specializes in the areas of credit reporting, credit scoring, identity theft, budgeting, and debt eradication. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter here.