3 Benefits of Increasing Your Credit Limit

When managed responsibly, increasing your total credit limit can be a strategic move toward better financial health.

Here are our top 3 benefits that come with having a higher credit limit:

Benefit #1: A higher credit limit improves your credit utilization ratio

Your credit utilization ratio is the amount of credit you're borrowing compared to your total available credit. It's a significant factor in your credit score, typically accounting for around 30% of your FICO score. That’s big!

A lower credit utilization ratio is generally better. Experts recommend keeping it below 30%, and ideally under 10%.

If you spend the same amount each month, having a higher credit limit can work to your advantage by decreasing your credit utilization ratio. Here’s an example:

Say you spend $1,000 a month and your credit limit is $2,000. That means your credit utilization ratio is 50%. But if you increase your credit limit to $5,000, and still spend the same $1,000 a month, your utilization drops to just 20%.

Maintaining a lower credit utilization ratio demonstrates to lenders that you're a responsible borrower, positively influencing your credit score.

Benefit #2: A higher credit limit can boost your credit score

As discussed above, a lower credit utilization ratio can directly contribute to a better credit score.

A higher credit limit can also indirectly boost your credit score. Lenders often view individuals with higher credit limits as more financially stable and trustworthy.

When you’re able to responsibly manage a higher credit limit over time, this demonstrates consistent financial discipline, which is highly valued by credit scoring models.

Benefit #3: A higher credit limit provides more financial flexibility

A higher credit limit offers you greater financial flexibility to handle unexpected expenses or emergencies such as a car repair, a medical bill, or a home maintenance issue.

Having a higher credit limit in these circumstances would allow you to more easily cover these expenses with a credit card that you can pay off over time. This increased buying power can serve as a safety net to complement your emergency fund, providing access to funds when needed without resorting to high-interest loans or other less favorable options.

What to consider before increasing your credit limit

While the benefits of increasing your credit limit can be significant, it's important to be aware of the potential drawbacks.

• Temptation to overspend: A higher credit limit can lead to increased spending and debt accumulation if not managed carefully. It's crucial to stick to a budget and avoid spending more than you can afford to repay.
• Negative impact on credit score if mismanaged: If you max out your higher credit limit, your credit utilization ratio will skyrocket, negatively impacting your credit score. Responsible spending is crucial for this strategy to work.
• Potential for higher interest charges: Carrying a high balance on your credit card can result in substantial interest charges, making it harder to pay off your debt. Always aim to pay off your balance in full each month to avoid interest.

 If you proactively request an increase to your credit limit, this may include a hard credit pull. If you are automatically offered a credit increase from your financial institution, you won’t incur a hard pull on your credit.

The bottom line is that it's important to only request a credit limit increase if you can be responsible with the increased limit and not overspend.

Should you increase your credit limit?

Increasing your credit limit can be a beneficial financial strategy, leading to improved credit scores, greater financial flexibility, and a lower credit utilization ratio.

However, it's important to weigh the potential drawbacks, such as the temptation to overspend, and ensure you can manage your credit responsibly. By understanding the pros and cons and your own financial habits, you can make an informed decision about whether increasing your credit limit is the right move for your financial situation.

If you’re interested in increasing your credit with VACU you can visit us in one of our branches, or give us a call.