Photo by Yuri-Shevtsov / Shutterstock.com
Here’s a question from a reader about what to do when you’d like to raise your credit limit, but your bank won’t budge.
I had a dark spot on my credit record from years ago. Since then I have been using my credit wisely and trying to repair the damage, which seems to be working. I was requesting and receiving regular credit limit increases, however I’ve now been told by my bank there’s a freeze on increases: not my account specifically, but all this bank’s credit limit increases.
I’d like to move away from them, but I’ve had the card for a little while. What are my options?
Here’s your answer, Seth — I’ve expanded it to include general advice on improving your credit and shopping for credit.
Credit card company not cooperating? No problem
If Seth wants more credit than his current bank is willing to provide, the answer is simple. He should keep that card and get another one. There’s no shortage out there: Go to our Credit Card page, and you’ll find dozens of cards competing for your business.
We also have plenty of articles that will help you decide which card to get, like “The Best Credit Cards for Insuring Your Rental Car” and “Ways to Play (and Win!) the Credit Card Rewards Game.”
With his improved credit, Seth can probably get another credit card without much hassle. However, since a long credit history is better than a short one, he shouldn’t cancel his existing card. Assuming there’s no annual fee, he should just stop using it and move on.
Why are you raising your credit limit?
While there are legitimate reasons to ask for higher limits, I hope Seth isn’t trying to raise his credit limit because he’s spending more than he’s making. He should be paying his balance in full monthly, not using his plastic to borrow. Carrying an unpaid balance on your credit card doesn’t help your credit score, and paying interest is never a good idea.
The best way to raise your credit score is the simplest: Pay your bills on time, every time, for long periods of time.
Seth might be trying to raise his credit limit to help his utilization ratio: the amount of credit used compared with the amount available. For example, if he has a $1,000 credit limit and uses $300 of it, he’s got a utilization ratio of 30 percent — the upper limit recommended by some experts to keep your credit score as high as possible.
There are two ways to lower a utilization ratio — pay down the balance, or raise the limit. Lowering a utilization ratio by raising a credit limit is a legitimate strategy, as long as you don’t use that increased limit to spend money you don’t have.
What affects your credit score?
Here are the key ingredients of your credit score, according to Fair Isaac Corp., creator of the FICO score:
- Payment history (35 percent): Your track record of paying back what you borrowed. Accounts in collection, late payments, and bankruptcy are bad; paying on time for a long period is good.
- Amounts owed (30 percent): As explained above, this includes the amount of credit you use compared with the amount you have. Maxing out your credit hurts it; keeping a lot of unused credit available helps it.
- Length of credit history (15 percent): The amount of time each credit account has been open. The longer your history, the better. This is why it’s typically best to keep older accounts.
- New credit (10 percent): This includes recent inquiries and requests for credit. While applying for a new card or two won’t hurt, regularly applying for new credit cards or other loans can cost you.
- Types of credit used (10 percent): There’s all kinds of credit out there, from revolving (credit cards) to installment (car and home loans.) Fair Isaac likes you to be well-rounded and sample them all. In short, diversity helps.
Want to raise your score? Get another type of loan
Credit cards are an example of revolving credit. If that’s the only type of credit reflected in your history, you might consider taking out an installment loan, like a car or home loan. That will positively influence your “Types of Credit Used.”
On the other hand, if you do that you’ll be paying interest, which will obviously cost money. If you need a car and have to borrow to buy one, or you want to buy a house and need a mortgage to pay for it, fine. But I wouldn’t recommend paying interest just to increase a credit score. Not worth it.
The bottom line
In recent years, financial writers — myself included — have published tons of credit score tweaks and hacks. That’s OK. Credit scores are important, especially when you’re about to borrow big for mortgages and such. But let’s not lose sight of the big picture: Great credit scores aren’t the result of hacks, they’re the result of a long history of on-time payments. I’ve never used any score tweaks or hacks, or even paid that much attention to my credit score, and it was recently a perfect 850.
If Seth’s current card company gives him the cold shoulder, he should move on. But higher credit limits are a double-edged sword. While they may send your score in the right direction, they can also cause you a world of hurt.
Tread carefully, Seth.
Got a question you’d like answered?
You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here.
The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Financial newsin 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
Got any words of wisdom you can offer for this week’s question? Share your knowledge and experiences on our Facebook page.