If you’re thinking about requesting a credit limit increase, you should run – not walk – to the nearest phone and dial up your credit company.
As long as you pay the balance off each month, a bigger credit limit may benefit you. A higher credit limit not only means the potential for greater purchasing power, it also means a better credit score.
Here are 5 reasons why a higher credit limit might be better for your overall financial health.
A Higher Credit Score
With a larger line of credit, you’ll instantly have a lower credit utilization rate. A higher limit will instantly create a situation where you suddenly have less debt in relation to how much credit you have available.
Say your current limit is $5,000 and you have $4,000 of it in recurring monthly expenses. In that scenario you’re using a whopping 80% of your available credit each month. That’s more than most financial institutions approve of which will result in them tagging you as high risk.
If your credit limit is increased to $8,000 your credit utilization rate drops down to 50%. Then if you can knock your debt down to $2,000 you’ll only be using 25% of your credit, which is right in the sweet spot, making you look like a better bet to creditors.
More Room For Emergencies
With a higher credit limit you’ll have room for unplanned expenses or emergencies. If something unexpected happens, it’s nice to have the funds to cover it.
While you should have a an emergency savings account for unplanned expenses, sometimes you don’t have enough to cover the expense.
Having a high limit credit card handy will give you access to cash wherever you are and you can cover emergencies if any should come up.
If you have a higher limit, you have more room to make more charges on your card. By paying your regular expenses with your credit card like your credit card bill or your utilities, you’ll earn rewards faster.
Just remember to pay off your bill each month entirely. That way you’ll get all the perks of a credit card without paying any interest fees.
Better Loan Terms
As mentioned earlier, a lower credit utilization rate will lead to a better credit score. The better your credit score, the better your loan terms will be.
You’ll be more likely to be approved for loans and you will certainly get cheaper interest rates too. For something like a mortgage, this can end up saving you tens of thousands of dollars over the life of the loan.
You can also use your new lower credit score to refinance any existing loans you got while you had bad credit.
With a higher credit limit, you’ll enjoy the benefits of purchase protection more of the time. Many credit cards offer purchase protections to customers whenever they charge something. These protections include extended warranties, return protection, damage protection and even identity theft protection.
A higher limit on your credit card means more coverages for the things you would normally buy anyway.
While higher credit limits can be a temptation to spend more, the increased flexibility is worth the trade off. If you have a credit card and a good history of paying your bill on time, it might be a good idea to call and request a credit limit increase.