The pros and cons of increasing your credit card limit (and how to do it)

Maybe you're still building your credit but your current credit card limit is lower than what you need. Or maybe you have a big purchase coming up and need more available credit. Whatever the reason, you’d like to consider if a credit limit increase is appropriate for you.

Only there's just one problem — you don't know how to increase your credit card limit or if it's even a good thing for your credit score or to assist you to manage your debt.

You're in luck! We're about to walk you through the steps to consider applying for a credit limit increase, as well as some of the benefits and drawbacks of getting one, so you'll have the info you need to decide what's right for you.

Obviously, the No. 1 benefit of increasing your credit card limit is that your credit limit increases so that you have additional credit if you need it (and you may avoid going overlimit in certain circumstances).

This also brings other benefits, which are listed below.

One of the key reasons to increase your credit card limit is to increase your purchasing power. A higher credit limit can help you if you need to make an unexpected big purchase and wouldn't be able to put it all on your card with your current credit limit. It's also helpful for people who are still building their credit and wish to continue to increase their credit limit to demonstrate the ability to pay and manage debt, or those who are rebuilding their credit. In those cases, many credit card companies issue low credit limits to start or credit cards that are secured by other property (such as a deposit). But you can potentially increase that limit after you improve your credit score or proving you can make your monthly payments on time.

One lesser known (but very important) reason for increasing your credit card limit is that it can help improve your credit score. (Yes, you read that right.) One of the metrics that goes into calculating your credit score is your credit utilization ratio, which is calculated by dividing the total amount of credit you're using (outstanding balances you have) by the total credit available to you (the limit that’s available that hasn’t been used). To get a good score on credit utilization rates, you should stay under 30%¹ of your available credit (vs what you used) on any one card. That means that if you have a $10,000 credit limit, you should always owe less than $3,000 on your card at any time (= 30% credit utilization rate). Frequently go over that? Increasing your credit card limit can help optimize your credit utilization.

Financial planners often tell people to have at least three to six months of savings to cover their expenses in case of an emergency or if they lose their jobs.² But what's not talked about as much is how having available credit can also help. Having an emergency fund in an easily accessible account should always be your default option. But some emergencies can't be paid for in cash (online things for example) and having room on your credit card to pay for them could be another option in a pinch, especially if you're still working towards making your emergency fund as robust as you need it to be.

The number one downside of increasing your credit card limit is that you could start to spend more – due to the available credit – and therefore your credit card balance could increase. You owe more! That could mean you get into more debt, if you don’t manage it, which could have a negative impact on your credit score.

One big downside of a higher limit is the potential for more debt. If you're experiencing financial difficulty and have used the rest of your available credit, you may likely be better off if you consider refinancing your credit card debt via a lower-interest personal loan or line of credit.

A rule to remember: if you aren't sure if you'll be able to use that extra credit responsibly, you're likely better off skipping a request to increase the credit limit on your credit card account or should not accept the pre-approved offer for a credit limit increase.

What are some other consequences of increasing your credit card limit? Hard credit check inquiries like applying for a credit card increase can decrease your credit score over the short term. That's because one factor in calculating your credit score is how much credit you apply for, which is tracked via every hard credit check inquiry a lender makes. This is confusing, isn't it? After all, we already said that a credit card limit increase could improve your credit score!

That's still true – and should be considered when you consider your options - but since credit requests are worth a smaller percentage of your total score it should likely outweigh the impact of a hard credit inquiry. So, why does this matter? It could make a huge difference if you're about to apply for a personal loan or a mortgage.

Soft and hard credit inquiries each serve a different purpose. A soft credit inquiry is often performed as part of a background check or during a pre-approval process.

For instance, your current credit card company might perform a soft check before pre-approving you for a credit increase. A soft inquiry is also done when you request your own credit report from a credit bureau.

All Canadians are eligible for a free annual credit report from the two major credit bureaus (Equifax and TransUnion). Checking your report regularly can help ensure the information — including soft and hard inquiries — is accurate. When a lender performs a soft pull, or you check your credit report, it won't impact your credit score because you aren't applying for new credit.

A hard inquiry occurs when you submit an application for a new credit card or loan. Most lenders will request a hard credit inquiry to review your credit report and decide if they want to approve you for credit or a loan.

Unlike a soft inquiry, a hard credit check can potentially knock your credit score down a few points.⁴  The reason a hard check can reduce your credit score is because it indicates to lenders that you're looking for new credit, and this can signal risk. A lender might assume that you're in need of credit because you’re financially unstable. The more number of hard inquiries you have in a short amount of time — the riskier you appear.

Some people rely too heavily on credit cards rather than also applying for other types of credit to diversify their credit mix.⁵ This is important since credit cards typically have higher interest rates than personal loans, auto loans or lines of credit. Before applying for a credit card increase, ask yourself (or better yet, a financial advisor) whether another credit vehicle might be a better fit. Because guess what — having a diverse credit mix is one of the things that could help boost your credit score.

When it comes to getting approved for a mortgage or a personal loan, the credit limit on your credit card may be considered by a lender in determining how much you can borrow. A credit limit that's too high could make you less attractive as a borrower or decrease the amount you qualify for on other borrowing. That said, typically for it to have a big impact, your combined credit limits on all of your credit accounts would have to be fairly high relative to your income.

If you're serious about increasing your credit limit, you'll want to know all the possible steps you can consider.

There are a number of avenues to get your credit limit increased. Just remember that applying for a credit limit – like applying for a new credit card - creates a hard credit check. Before you apply, you might also want to learn more about how to increase your credit score. The better your credit score, the better the chances you should have to be approved for a credit limit increase.

If you go through the work of applying for a credit limit increase and get declined, it can be disappointing — especially if you were counting on the increase. But knowledge is power. If that happens, here's what you should know.

• It's not personal. While it likely feels personal, credit card limit increases are really calculated based on a formula. If you didn't get approved, it says nothing about you personally. It's about your credit history and income and could also be about your payment history. You could even have good credit but, according to the issuer's rubric, giving you a credit limit increase is too big of a risk at this time.
• Your credit score isn't high enough. Another reason could be that your credit score isn't high enough so you might need to keep working to build it. Paying your credit cards on time (by the payment due date and at least the minimum payment owed each month if not more), keeping your credit utilization under 30% and following other responsible money habits can help boost it. You can reapply for a credit limit increase if you still need to when you have a higher credit score. It's always a good idea to explore ways to increase your credit score, decide on how you'll achieve it and check your credit score regularly.

Whether you decide to go ahead with it or not, it's important to keep in mind that increasing your credit card limit has both advantages and disadvantages. Increasing your credit card limit can help you boost your credit score, but it can also hurt it. Remember to look at things like your credit mix, utilization ratio and other criteria we mentioned above before applying for a credit limit increase. Also, keep new credit limit increase requests to no more than every four to six months, or even better, once a year.