2 Pros and Cons of Having More Credit Than You Need

I was talking to a friend recently who told me that one of her credit card issuers had increased her spending limit to $60,000. My first thought was, "Yikes! That's a lot of charges to potentially rack up."

Of course, my friend is highly unlikely to use her $60,000 credit limit in full. But it got me thinking about the pros and cons of having access to more credit than you need. Here's why that could be a good thing, but also, a very bad one.

Pro No. 1: Your credit score might benefit

One big factor that goes into calculating your credit score is your credit utilization ratio. That ratio measures the amount of your available credit you're using at once. And the lower that ratio, the more your credit score can benefit.

Now as you might imagine, keeping your credit card balances low is a good way to maintain a lower utilization ratio. But another way to achieve that same goal is to have a higher credit limit than you need.

Let's say you owe $10,000 in credit card charges but have a $20,000 credit limit across your various cards. That puts you at 50% utilization, which isn't great from a credit score perspective.

However, with a $60,000 credit limit, your $10,000 balance puts you at about 17% utilization, which is actually good for your score, despite $10,000 being a lot of money to owe on a credit card in general. So if your credit limit increases but your balance doesn't, your score stands to benefit.

Pro No. 2: You have a backup option in the event of a financial emergency

In an ideal world, you'll be able to tap your emergency savings when a surprise bill lands in your lap. But if you encounter a truly astronomical expense out of the blue, your emergency fund may not cut it. In that case, having access to extra credit could serve as your backup plan -- even though it's not an optimal one, as it could mean racking up scores of interest on that debt.

Con No. 1: You may be tempted to spend more

The more spending power your credit cards give you, the more tempted you might be to use it. Let's say you have a $20,000 credit limit across your cards but the monthly bills you charge normally amount to $5,000. Well, it takes a lot of willpower in that situation to only rack up $5,000 worth of charges month after month.

If you use your higher credit limit to spend more, you could end up costing yourself a lot of money in interest. You can also damage your credit score by eventually driving your utilization into unfavorable territory.

Con No. 2: Your credit score might be dinged for opening too many accounts in short order

You may end up with access to more credit than you need by applying for a number of new cards in short order. But actually, that very practice itself has the potential to drag your credit score down.

Each time you apply for credit, a hard inquiry is done on your credit report. A single hard inquiry will usually result in about a five- to 10-point credit score drop, so a single one isn't so bad. But three or four hard inquiries within a short time frame could cause more damage.

All told, it's not automatically a bad thing to have access to more credit than you need. But you'll have to be mindful of your spending and avoid taking advantage of your higher spending limit.

And if you don't trust yourself to do so -- say, because you've landed in debt due to overspending in the past -- then don't chase a higher spending limit. If your credit card issuer offers to increase your limit, say no. Or, at the very least, don't ask for a credit limit increase if you don't want that temptation to exist.