Credit cards are the go-to payment method for many of us, since they’re convenient and give us buying power when we need it. But many of us have gotten that unexpected email from our credit card company saying that they’ve decided to give us more credit. Which of course seems really validating at first—what an awesome, responsible credit card holder we must be, for them to want to give us even more credit! But wait… is that a good idea? Here are the advantages and also the credit card limit increase cons to watch out for.
Understanding credit limits
A credit limit is the maximum amount of money a credit card company will let you borrow. It’s based on factors like your credit score, income, and credit history. When you reach your credit limit, you can’t make more purchases until you’ve paid off some of the balance.
Advantages of a credit limit increase
1. Improved credit utilization ratio
Your credit utilization ratio is the percentage of your available credit that you’re using. A higher credit limit can lower this ratio if you keep your spending the same. A lower ratio is generally good for credit and could potentially boost your credit score.
2. Emergency preparedness
Having a higher credit limit can provide a safety net for emergencies. If you’re faced with an unexpected expense, a higher limit can help you cover the situation without resorting to high-interest loans.
An increased credit limit can provide more financial flexibility. It allows you to make larger purchases or cover unexpected costs without straining your budget.
4. Potential rewards
Some credit cards offer rewards or cash back based on a percentage of your spending. With a higher credit limit, you have the opportunity to earn more rewards if your spending habits remain responsible.
Credit card limit increase cons
1. Temptation to overspend
A higher credit limit might lead to overspending if you’re not disciplined with your finances. Having more credit available doesn’t mean you should utilize it all, as it could lead to accumulating debt that becomes difficult to manage.
2. Increased debt
With a higher credit limit, there’s a risk of accumulating more debt than you can pay off. Carrying a high balance can result in hefty interest charges that can add up fast..
3. Hard inquiry
Requesting a credit limit increase often involves a hard inquiry on your credit report. While a single inquiry might have a minimal impact, multiple inquiries within a short period can temporarily lower your credit score.
4. Credit score impact
While an increased credit limit can lower your credit utilization ratio, the potential to get into trouble with additional credit might outweigh the benefits, especially if you have a history of overspending.
Making an Informed Decision
Before deciding whether a credit limit increase is a bonus or a bad idea, consider these factors:
1. Financial discipline
Evaluate your spending habits and financial discipline. If you’re prone to overspending or carrying a balance, a credit limit increase might not be in your best interest.
2. Credit score goals
If you’re actively working to improve your credit score, a credit limit increase could help by lowering your credit utilization ratio. However, ensure that you don’t fall into the trap of overspending.
3. Emergency preparedness
Consider whether a higher credit limit aligns with your emergency fund goals. While it can provide a safety net, relying solely on credit for emergencies might not be the best strategy.
4. Long-term financial goals
Reflect on your long-term financial goals. Will a higher credit limit hinder your ability to save, invest, or pay off debt? Ensure that any decision you make aligns with your broader financial aspirations.
The bottom line: credit card limit increase cons
A credit limit increase can be a bonus or a bad idea depending on your individual financial situation and habits. While it offers benefits like improved credit utilization, emergency preparedness, and financial flexibility, it also comes with the risk of overspending, increased debt, and potential negative impacts on your credit score. Before requesting a credit limit increase, carefully assess your financial goals, discipline, and needs to make a decision that supports your overall financial health.