by Maurie Backman | Feb. 15, 2020
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There's a downside to having more leeway on your credit cards.
Your credit limit is the maximum amount of money you can borrow on your credit card, and increasing it will mean you have more accessible funds -- which can be both good and bad.
If you've held the same credit card for quite some time, there's a good chance you may be eligible for more favorable terms than when you first signed up. Once your account has been in good standing for at least six months, you can call your credit card issuer and ask to have your credit limit raised. If you are a responsible customer and have paid your bills on time, you'll likely get what you want.
But while having more flexibility may be nice, there's a downside to having the leeway to charge more on your credit card.
Having the ability to charge more on your credit card can benefit you in a couple of ways.
In an ideal world, you'd have a solid emergency fund to tap for unplanned expenses. In reality, many people don't have much money tucked away in savings. If you're in that situation, a higher credit card limit gives you more leeway to cover unanticipated bills, whether they're home-related, car-related, or health-related in nature.
There are five factors that go into calculating your credit score, one of which is your credit utilization ratio, or the extent to which you use your revolving credit. Your credit utilization should be at 30% or below to avoid negative impacts on your score. Generally, the lower your utilization ratio, the better -- as long as you keep it above 0%. And the higher your credit limit, the easier it is to keep your utilization in favorable territory.
If you owe $4,000 against a $10,000 credit limit, you're at 40% utilization, which isn't great. But if you manage to get your credit limit raised to $12,000 and you don't increase your balance, you'll be at 30% utilization. Getting a higher credit limit can help your score without you having to pay off any of your existing debt.
While there are upsides to increasing your credit limit, being allowed to charge more on your credit card could also bring some negative consequences.
When you're given a $3,000 credit card limit, the most you can charge on that card is $3,000. When that limit increases to $5,000, you suddenly open the door to charging an extra $2,000. If you have a tendency to give in to temptation on the shopping front, then you shouldn't ask for a limit increase.
A higher credit card limit could translate to more debt, and when your outstanding balance climbs, guess what happens to your utilization? That's right -- it goes up, and your score goes down.
Also, racking up a higher balance puts you at risk of not being able to keep up with your minimum credit card payments. Fall behind, and your payment history will take a ding. Payment history is the most important factor in calculating your credit score, so any missed payments could send that number plunging downward.
If you trust yourself to manage your spending responsibly, then raising your credit card limit could be a helpful move. But if you have a tendency to go overboard on spending, then you may be better off leaving your existing limit alone.
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