This is part two of a four part series on personal finance basics. Part one is suggested, but not mandatory pre-reading. The beauty of having a blog is that you can share lessons you learn, right as you learn them. Hopefully, this post provides a useful nugget of info that you can apply sometime in the future.
As mentioned in part one, it’s important to be mindful of your credit score and work to improve it. A less commonly mentioned method of doing this is increasing your credit limit (the total amount you are allowed to charge to your credit card).
One method to improve your score is to increase your credit limit. This works by lowering your credit utilization ratio, which is the percentage of your available credit that you are using. Credit utilization accounts for 30 percent of your FICO score, meaning the lower your credit utilization, the higher your score.
You can get a higher spending limit by contacting your creditor and submitting a request. Make sure you read below before you make a move.
1. Your credit can automatically increase
There is a chance that you won’t have to do anything for your credit limit to increase. Credit card issuers periodically review their customer’s data and decide to increase their credit limit. A creditor is more likely to increase your limit if it is relatively low. The higher your limit, the less likely you’ll be automatically bumped up.
The best way to get an automatic increase is to ensure your account has relatively low limits. The higher your limit, the less likely it is that your issuer will hike it for you.
2. Don’t ask too soon
Don’t request a limit increase within six months of getting a new card, as it could be an instant red flag that could lead to denial. Creditors usually review accounts semi-annually and want to see some history of good behavior before considering increasing their trust in you.
3. Don’t ask for too much
It’s also wise to be conservative with your request. The size of your request factors into the creditor’s decision to approve, or deny, your increase.
Plan on asking for an increase between 10 to 25 percent of your current limit. If you ask for too much and get declined, you’ll have to wait at least three months before asking again.
4. Only request an increase for your best credit card
You shouldn’t be requesting increases on all your cards. When an issuer pulls your credit report to review your payment history, it causes a temporary dip in your credit score. If you are applying for increases on multiple cards, this will be a red flag that can both hurt your score and serve as cause for rejection.
If you make one strong case to your favorite company, your chance of success is greatest and you’ll save time.
What are creditors looking for?
I’ve already mentioned a few key components, but a creditor’s review is not pure math. They want to see a strong payment history, you should be paying your whole balance off every single month. Late payments are a red flag that indicate you shouldn’t be trusted with a larger balance.
When talking to the company, mention your loyalty, but don’t be afraid to mention that you are willing to take your business elsewhere.
Maintain this practice for a few years, and you’ll slowly build up a substantial credit allowance.
This is part two of a four part series on personal finance fundamentals. Click here to check out part one.
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