How to make your credit limit higher

A credit card doesn't have to be the piece of plastic you hide in the back of your wallet for emergencies only. In fact, with the proliferation of cards that let you earn rewards from cash to airline miles, your credit card can be an amazing financial tool. But if you opened your account when you were fresh out of college or when your credit score wasn't so great, you might not have a very high spending limit.

The good news is that you can ask for an increase in your credit limit. But you might be wondering, "Does requesting a credit increase hurt my score?" The good news: probably not. Before you ask, though, learn how to increase your limit without lowering your credit score.

How Is Credit Limit Determined?

Your credit limit is the maximum amount of money you can borrow against at one time. Card issuers determine the size of your limit based on a few factors.

For one, your payment history will play a big role. If you've paid all of your bills on time in the past, you're likely to get a larger limit than if you've missed several payments. Issuers will also consider how many accounts you have open and the amount of credit available to you vs. how much you owe. Your income is also important, as you need to be able to afford your monthly payments.

Ultimately, the exact reasoning behind your credit limit is up to the individual credit card company. However, if your credit score is in good shape and you've demonstrated a history of responsible borrowing, you're likely to receive a larger limit.

How to Request a Credit Line Increase

If you want to increase your credit limit, usually all you have to do is ask. "Creditors usually don't mind increasing credit lines," says Mike Sullivan, a personal finance consultant and previously the director of education at Take Charge America, a national nonprofit credit counseling and debt management agency. "In fact, they welcome it if they believe you will use it and pay." Here are a few ways you can go about it.

Many card issuers make it easy to ask for a credit limit increase. All you have to do is log into your account online and navigate to the card services page. Here, you may find an option to request a credit limit increase. If so, select this option and enter any information you're prompted to update, such as your annual income, employment status and monthly housing payment. In many cases, you'll receive a response right away as to whether your limit has increased.

If there's no option to request an increase online, you can instead call the number on the back of your card and make your request to a customer service representative. Again, the issuer may ask for some basic financial details, so have that information ready. You may get an answer right away or need to wait up to around 30 days.

Wait for It to Happen Automatically

If you're ready for a credit limit increase, you might find that your card issuer has already granted you one. It's not unusual for issuers to increase credit limits periodically as a reward for spending regularly but responsibly and for paying your bill on time. However, most major card issuers will not automatically raise your credit limit until you have at least six to 12 months of on-time payments and haven't exceeded your credit limit in the past, according to Rod Griffin, director of public education for the credit bureau Experian.

If you're denied an increase, consider opening a new card instead. "Different lenders have different policies. One may be trying to limit credit while another wants to expand it," says Sullivan. By opening a new card and keeping your balance to a minimum, you can reap the same benefits as having an existing card's limit increased. Just keep in mind that applying for a new credit card will result in a hard credit inquiry.

How Your Credit Limit Affects Your Overall Credit Score

Your credit limit alone doesn't affect your score, but the way you use it can. "Your credit limit represents the amount of available credit you have," says Sullivan. "By itself, it doesn't have much impact, but the amount you owe represents your utilization, and that can matter a great deal."

Your credit utilization is calculated by dividing the total amount of revolving credit you owe by the total amount of credit extended to you. For example, if you have a credit card with a limit of $1,000 and you carry a balance of $100, your credit utilization ratio is 10%. However, if you charge another $500, your utilization jumps to 60%.

Credit scores consider both the utilization rate on each credit card as well as your total credit utilization across all accounts.

Griffin says, "A good rule of thumb is to always keep your utilization rate below 30%. However, the lower your utilization rate, the better. ... While a high credit utilization rate can be a sign of financial distress, a low credit utilization rate shows that you're using less of your available credit."

Griffin says credit scoring models will interpret low utilization to mean you're doing a good job of managing your credit and keeping spending in check. And considering that it makes up 30% of your overall FICO score, credit utilization is a factor to take seriously.

How to Increase Credit Limit and Improve Your Credit Score

So, does requesting a credit limit increase hurt your score? Although people are often wary of ways they can accidentally hurt their credit scores, increasing your credit limit is actually an easy way to improve your score. Here's how:

• Decrease your credit utilization. One of the biggest benefits of a credit limit increase is that it can have an instant positive impact on your credit. "Increasing your credit limit immediately decreases your utilization," says Sullivan. For instance, say you increased your credit card's limit from $1,000 to $2,000 and left your $600 balance untouched; your utilization would drop from 60% to 30%. That could have a significant, positive effect on your score.
• Maintain a low balance. Of course, this strategy doesn't work if your balance grows along with your credit limit. Griffin says, "For some people, higher credit limits could represent the temptation to spend more." That means you won't reap the benefits of a higher credit limit. In fact, you could end up increasing your utilization rate if you're not careful. "In general, the best way to improve your utilization ratio is to pay down your credit card balance and then keep it as low as possible," says Griffin.
• Avoid too many hard inquiries. Although a credit limit increase is generally good for your credit, requesting one could temporarily ding your score. That's because credit card issuers will sometimes perform a hard pull on your credit to verify you meet their standards for the higher limit. Hard credit pulls generally knock down your score by up to five points and stay on your credit report for two years.

Pitfalls to Avoid When Asking for a Credit Line Increase

In theory, increasing your credit limit should have an overall positive effect on your credit score. But the health of your credit depends on the way you manage your accounts. Be sure not to undo the progress you've made by making these mistakes with your credit:

• Missing payments. "The worst thing you can do to your credit score is miss a payment," says Sullivan. Accounting for 35% of your FICO score, payment history is the most important credit score factor. Missing just one payment on a bill can drop your score significantly.
• Applying too many times. If you've been rapid-firing requests to increase credit limits on your cards, Sullivan recommends slowing down and making deliberate decisions when it comes to changes to your financial situation. Too many changes at once, such as several requests for credit over a short period, could spell trouble for your score. Only apply for new credit when you truly need it.
• Making it easy to overspend. When it comes to increasing your credit limit, really consider your total financial picture first. Griffin says, "For example, if you know you're a big spender, it may not be a good idea to request an increase because of the potential to stack on more debt and damage your credit scores."

On the other hand, if you have a good handle on your finances and are able to keep balances low, increasing your credit limit could be the key to opening up your financial opportunities.

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