It is important to have good credit. It opens up avenues for lesser interests and it affects future loan approvals for larger purchases. Therefore, although having a bigger credit limit is better, here is what you must know for building your credit in the right manner. Two factors decide if a rise in credit limit will help or hurt your credit score. They are the type of inquiry performed by a lender and your credit utilization.
Credit utilization
Similar to several considerations it all boils down to balance. If the credit limit is raised and yet your spending balance remains the same, you are using a lesser percentage of your overall available credit limit. It reduces the percentage of your credit utilization that improves the credit score. However, if you spend more because of the available credit limit, it increases the credit utilization percentage and negatively affects your credit score. Therefore, this rise will not hurt your score and actually might improve it.
What matters most is your spending behavior. You need to strive to maintain your balances at less than 30% of the overall available credit limit. For instance, if you have a credit limit of $10,000 available, you need to maintain a balance of less than $3000. Maintaining credit utilization at less than 10% is considered to be excellent. Keep in mind that 30% of your overall credit score depends on credit utilization.
Lender’s inquiry
If you have applied for a mortgage, a new credit card, another kind of loan, or a rise in credit limit, the lender will make necessary inquiries. The hard inquiries end up decreasing your credit score by ten or lesser points. They stay on the report for a couple of years therefore, to open several cards for having credit can turn out to be detrimental. When you are shopping for a large loan or a mortgage and there are many inquiries made within a short period, as you are looking for the best available rate, they will appear to be a single hard inquiry.
If you have lenders with whom you have an established history of credits and with a track record, you might be able to get soft inquiries that do not need pulling credit reports. These soft inquiries do not affect your credit score negatively. Many times, a smaller rise is provided without any need for a hard inquiry. Just ask what amount makes for the difference. It is a good idea to ask the lender whether he will make a soft or hard inquiry before he formally requests for a rise.
What goes up has to come down
Your lender has all the rights to decrease your credit limit for mitigating the risks without any advance notice. Your credit limit may get lowered if you rarely use or do not use your card, your income has decreased, you have missed on some repayments, or difficult economic periods are changing your credit habits. When one of these things happens, it is a good idea to manage the credit utilization percentage. If you can have a lower overall credit without decreasing the spending, it will drive up your percentage ratio. You may ask for a credit limit rise on another card or apply for a new card. However, the other lenders might not be willing to take these risks. It is recommended to decrease the balances as far as possible.
If you can maintain a low credit utilization, a rise in credit limit is likely to be advantageous for your credit score. In case you are likely to get tempted to spend as much as your credit limit, higher debt is likely to outweigh all the prospective advantages from a rise in the credit limit. If you live in Clearwater and Pinellas County area, and you are looking for expert advice about your credit score, get in touch with Super Credit Repair for assistance.
Picture Credit: Crello