Financial Sense

June 2021

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Financial Sense
Should You Accept That Credit Limit Increase?

Credit limit increases are typically offered to customers who show that they can use their credit responsibly. This includes making timely and regular payments to your credit card and maintaining a good credit score. But is accepting a credit limit increase a good idea? Generally, yes–though there are some factors to consider before making your decision.

Benefits of a Higher Credit Limit

Even if you don’t feel that you need more credit than you currently have, there are a number of advantages to having a higher limit.

Lower Credit Utilization – By increasing your credit, you will have a lower credit utilization ratio, which is better for your credit score. For example, if you are carrying a $400 balance on a credit card with a limit of $1,000, then your credit utilization ratio is 40%. But, if you increase your limit to $2,000, the ratio will be lowered to just 20%.

Emergency Credit – A higher credit limit can act as a financial cushion in the event of an emergency. You will be better able to manage surprise expenses like medical bills, vehicle repairs, and home repairs. Plus, credit can often be hard to come by when you need it the most, so accepting the increase ahead of time may help you out in the future.

Avoid a Hard Credit Check – If you apply for a credit limit increase without being offered one, your lender will perform a hard credit check, which will lower your credit score. On the other hand, accepting a pre-approved increase does not trigger a hard credit check, leaving your credit score unaffected. This is another reason why it is good to preemptively accept an increase before needing one.

More Reward Points – Increasing your credit limit may make it easier to accumulate reward points. Perhaps you will shift more of your daily spending to your credit card or use it to make larger purchases. Either way, your points will build faster, and you will be able to redeem them for more rewards.

A Word of Caution

With so many benefits, accepting a credit limit increase might seem like it is always a good idea. However, having more credit means the potential to accumulate more debt. This is a very significant consideration, especially if you already tend to spend near your current limit. Because accepting an increase will suddenly lower your credit utilization ratio, you may also be tempted to make large or unnecessary purchases and risk losing track of your spending. Most importantly, if you are currently struggling to pay off debts, a higher credit limit won’t make it any easier.

The Bottom Line

Choosing whether or not to accept a credit limit increase depends on your personal financial goals and spending habits. While acceptance is typically recommended for all the benefits it offers, it might not always be the best option for your situation. It is crucial to weigh the pros and cons before coming to a decision.

Being honest with yourself about how you will use the extra credit and whether it will present a financial opportunity or a financial risk is the only way to really know whether you should accept that credit limit increase.

Published by DrivingSuccess.ca® on behalf of Trent Valley Honda
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