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Increasing your credit limit just means giving yourself the opportunity to spend beyond your means, right? Not necessarily. Increasing your credit limit can have a number of upsides if you manage your credit wisely.
SEE: Check Your Credit Report Lowers Your Credit Utilization and Increases Your Credit Score
The FICO credit scoring model will ding your credit score if the amount of credit you’ve used is close to the total amount of credit available to you. That’s because it considers you to be at risk of maxing out your cards and having trouble making future payments. You might know that these risks don’t actually apply to you, but that’s how the scoring model works.
If you have a $2,000 credit limit and you regularly end up with a monthly bill of around $1,800, you’re using 90% of your available credit. Raising your credit limit will reduce that percentage and should improve your credit score.
Cheaper and Easier to Get Loans and Additional Credit
When you’re not using nearly all of your available credit, you appear to be financially responsible to the credit bureaus and your credit score should increase. If your credit score is higher, you will have a better chance of getting approved for a credit card, car loan or mortgage in the future. You’ll also have a better chance of getting a lower interest rate, since your credit score determines whether you’ll be offered the best available rate or a higher, risk-adjusted rate. (For additional reading, check out How To Dispute Errors On Your Credit Report.)
Helps in an Emergency
Having a credit limit well in excess of your usual spending amount gives you a resource if you have a genuine emergency that you can’t pay for with cash. Say you’re travelling and you need to change your plans and return back home immediately – it probably won’t be cheap to change your plane ticket, and it’s easier to pay for a plane ticket with a credit card.
Increases Your Rewards
If you consistently pay off your balance in full and on time but you’re not putting all of your expenses on your credit card, it might be time to start. Having a higher credit limit can help you do that. The conventional wisdom says that you shouldn’t charge everyday expenses like groceries and gas to your credit card, but that advice only applies if you’re carrying a balance – it’s designed to help you avoid making a bad problem worse.
If you never carry a credit card balance, paying for recurring expenses on your credit cards won’t cost you anything and can help you earn more rewards. Those rewards can actually reduce your spending in other areas by helping you pay for vacations, gifts, clothes and nights out. (To learn more, read Rewards Credit Cards That Give Back The Most.)
Lets You Make Large Purchases Efficiently
You already know that using your credit card to pay for large purchases is convenient and can help you rack up rewards. What you might not know is that your credit card likely includes a number of consumer protections that can come to your rescue if there is a problem with your purchase. For example, MasterCard’s protections include extended warranties, price protection and coverage for damaged or stolen items. American Express offers similar benefits. Check your credit card agreement to see what protections apply to your cards.
Helps You Avoid Credit Score Dings
One way to get access to more credit is to get another credit card, but increasing your limit on an existing card might be a better option. According to FICO, opening a new credit card can ding your score. When you open a new account, it shortens the length of your credit history, and a longer history often means a better score. The age of your oldest account, the age of your newest account and the average age of all your accounts are factored into the length of your credit history, and this metric affects around 15% of your score.
The Bottom Line
If you know you’re likely to spend up to your credit limit no matter how high it is, that major drawback will outweigh these benefits of increasing your credit limit. Otherwise, consider requesting an increase. It’s usually as simple as sending an email to customer service. (For more information, read How Many Credit Cards Should You Have?)
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This story was originally published by Investopedia.