Why Requesting a Credit Line Increase is Beneficial for Your Credit Score
In today's financial landscape, maintaining a good credit score is crucial. One strategy to enhance your credit score is to request a credit line increase on your credit card. This article explores the reasons why you should consider increasing your credit line and how it can positively impact your credit score.
Understanding Credit Utilization and FICO Scores
What is Credit Utilization? Credit utilization refers to how much of your credit limit you are using at any given time. Your current credit utilization ratio is a critical factor in calculating your FICO score, which makes up approximately 30% of your overall credit score. A high utilization rate can negatively impact your score, while a low utilization rate can boost it.
Impact of High Utilization
Many individuals believe that keeping their credit card balance below 30% of their credit limit will not affect their FICO score. However, this conventional wisdom is often wrong. According to FICO, you start losing FICO points when your balance reported to the bureaus exceeds about 10% of your limit. For instance, if you have a $5,000 limit and a $2,500 balance, your utilization is 50%. This can cost you 50-75 FICO points even if you pay the balance in full.
Optimal Credit Utilization for FICO Score
To maintain a positive impact on your FICO score, it's advisable to aim for limits of at least ten times your typical spending on any card. This keeps your reported balance below 10% of the limit. Whenever possible, ensure you carry a zero or minimal balance month-to-month to avoid unnecessary interest rates (18-24% is typical) and build a healthy financial habit.
Enhancing Your Chances of Approval for New Credit
Having a higher credit limit can also enhance your chances of being approved for other credit cards or lines of credit. Creditors are more likely to approve borrowers with higher credit limits and lower utilization rates. With this in mind, it's beneficial to keep your balances low even if your credit limit is high.
Personal Experiences and Insights
Cardholder Perspectives: Personal anecdotes can provide valuable insights into the practical benefits of increasing your credit line. For instance, one individual has 14 active credit cards, including a Wells Fargo card for daily purchases and a Chase card for Amazon purchases that offer a 5% discount. Other cards are reserved for specialized purposes, such as a Chevron card that offers a dollar discount per gallon of gas. Such cards are often acquired to take advantage of special deals and discounts.
Strategic Use and Rotation
Strategically rotating cards can help manage credit utilization effectively. For example, if a card isn't frequently used, its utilization can become high, negatively impacting the credit score. This was the case with a Capital One card that was turned down due to infrequent use. By rotating the card to the front of the wallet, the credit limit was magically increased from $6,000 to $8,300.
Dealing with Special Offers
To avoid falling into the trap of high credit utilization from deals like "90 days same as cash" offers, it's important to understand the true implications. When retailers offer financing for large purchases, they often use revolving accounts (credit cards) and set the limit equal to the financed amount. This can negatively impact your credit score. Insist on a higher credit limit if you accept such offers. Ideally, opt for installment loans from your bank or credit union, which typically have lower interest rates and won't harm your credit score as much.
Conclusion
In conclusion, requesting a credit line increase can significantly improve your credit score by lowering your credit utilization ratio. By managing your credit limits effectively and rotating cards, you can build a stronger financial profile. Remember, the key is to aim for limits that are ten times your typical spending and maintain a low balance to maximize your credit score.