Does Increasing your Credit Limit Affect your Credit Score?

You might be afraid to ask for or accept a credit limit increase because of how it may affect your credit rating. This dilemma is common among many Canadians! 

But as long as you're not spending a lot more with your credit increase, you shouldn't see much of a negative impact. In fact, a higher credit limit may improve your credit score by reducing your credit utilization rate.

Increasing your credit limit might also affect your credit score depending on whether your credit card company makes a soft or hard credit inquiry. 

A soft inquiry won't affect your credit score. They're a surface level check to gauge your creditworthiness that you or a lender can make. Credit card companies often make soft inquiries to pre-approve you for credit increases. 

A hard inquiry affects your credit score. It's a formal review of your credit report that usually occurs in response to a loan, credit card, or line of credit application. Hard inquiries can remain on your credit report for up to two years. But any credit score reduction caused by a hard inquiry can usually rebound in a few months, as long as you're responsible with any outstanding debts. 

How Do You Get a Credit Limit Increase?

Increasing your credit card limit generally comes in one of two ways. First, your credit card company might offer you a credit limit increase. This may occur after the company reviews your spending habits, whether you use credit responsibly, how long you've had your card for, and other factors. 

Some credit card companies have guidelines for offering credit limit increases. There may be a mechanism that automatically creates an offer once you meet specific criteria — for example, having a responsible spending pattern for the past 18 months. 

You can also request an increase. Doing so can require you to provide information similar to the initial credit card application — e.g., Who's your employer? What's your income? and What are your other debts? The company also reviews factors like how you've used your current credit limit and how long you've had your card. 

Your credit card company might further check your credit score to determine if they should increase your limit. A credit check allows a lender (like a credit card company, bank, or credit union) to see your credit history and how well you've managed debt in the past. 

When Is It Appropriate to Request a Credit Limit Increase?

Timing is crucial to determine whether you can receive a credit limit increase. Often, you want to wait until you've had some time with a credit card. If you make a request within the first few months of obtaining a new card, the company may not have sufficient data to determine whether a limit increase is viable. 

To maximize your chance of approval, attempt a request when something positive happens in your life. For example, if your household income increases, your debt load decreases, or you've improved your credit score. These situations can signal that a credit increase is a low risk to your credit card provider. 

What Factors Determine My Credit Increase Eligibility? 

Numerous factors such as your income, credit history, current debt, and credit utilization can affect whether you're eligible for a credit increase. The essence of all these variables is to determine your likelihood of paying bills on time. 

The following are a few steps to increase your chances at a credit increase:

• Keep your financial and personal details up to date: Updating financial information helps credit card companies understand whether you're now in a higher income bracket or have less debt. 

• Make your monthly bill payments on time: If you regularly make your monthly payments, this can signal that you're a lower risk to a lender. 

• Make a higher-than-minimum payment on your credit card: Full credit card payments, or at least more than the minimum, every month show you're responsible when managing your credit. 

• Check your credit report regularly: Regularly review your credit report to understand what credit card companies see when they consider you for a limit increase. Regular reviews can also let you spot inaccuracies promptly. 

• Keep an eye on your credit score: Your credit score is a significant factor in determining credit limit eligibility. You can check your credit score in Canada for free with Borrowell.

What Should I Do If I'm Offered a Credit Limit Increase?

Just because the credit card company offers an increase doesn't mean you should accept. Consider whether this increase might tempt you to spend beyond your means. 

A credit limit increase might turn the new ski jet you've been eyeing into a possible reality. But you still need to think about whether you have the money to pay off your balance at the end of the month. More credit is not more income, and it shouldn't change your spending habits. 

Can My Credit Limit Be Lowered?

Card issuers can make the decision to reduce your credit limit without notice. This action lowers their risks and commonly occurs if your card is inactive. Credit card companies may also reduce your limit if they've suddenly determined you're a higher lending risk or if your payment habits have changed. 

For example, if you've always made regular full payments but then switch to making monthly minimums, it may spook your credit card company and cause them to lower your limit. 

If they lower your credit, you can call a representative to understand why they did so and possibly change their minds. 

A reduced limit won't generally lower your credit score directly. However, it can reduce your credit utilization ratio, which is linked to your credit score indirectly.

How to Increase Credit Limit While Also Improving Your Credit Score?

Credit utilization is one factor in determining your credit score. Your credit utilization ratio is the ratio between how much credit you have and use. Suppose your credit card balance is $500 and your credit limit is $1,000. In this case, your credit utilization ratio is 50%. This ratio is calculated among all your credit products. 

Generally, a utilization rate under 30% is considered 'good' and positively affects your credit score. So, a higher credit limit can positively influence your credit score because it reduces your utilization rate as long as your credit use remains the same. 

A credit limit increase can affect your credit score through a hard inquiry or by bettering your credit utilization rate. Whether you can qualify for such an increase depends on various factors, including your credit score and credit report. So, regular reviews of your credit score and report can maximize your chances at an increase. 

Borrowell lets you download your credit report and check your credit score for free without impacting your score!