Should You Really Increase Your Credit Card Limit? Here's What To Consider

If you've been in the workforce for some time, you're no stranger to the concept of credit cards. Fundamentally, a credit card is an instrument that lets you purchase now and pay later for a good or service. To qualify for credit cards, you must demonstrate that your repayment behaviors and income growth are up to the mark. Maybe you don't need to use a credit card when paying for groceries, but for larger purchases like electronics, travel tickets, and luxury items, a credit card might help you manage short-term expenses when you're cash-strapped.

However, with capital financing comes temptations. "The major risk of using credit cards is debt," says Phil Dengler, co-owner of The Vacationer, to Time. We sometimes lose sight of the fact that using a credit card is essentially taking out a loan that needs to be repaid. That's why each card type comes with its own maximum credit limit — the highest amount that you can spend on your card. Although banks will sometimes let users go over their limit, they'll likely be charged over-the-limit fees, per HSBC. For those habitually spending beyond their means, a credit limit serves as a deterrence against irresponsible purchases. For those who always pay bills on time with their existing lines of credit, however, a higher credit limit might open new doors — like lower credit card utilization, higher credit score, and more purchasing power. If a credit limit raise has been on your mind, here are some factors to consider before calling your bank to request it.

Before you get all jumpy about having your credit card limit extended, rest assured that most credit card companies increase their cardholders' spending limit on their own after the first few months of the account opening. If you pay every bill on time and your credit score shows that you're a responsible spender and a valuable customer, you won't have to wait long until your credit card company rings you up or sends you an email to inform you of an increase in your limit, according to Bankrate.

So, if you want an upgrade without having to ask for it, start working toward it and make your profile stand out. In addition to spending responsibly and keeping track of payments, Capital One recommends checking your account at least once a year to keep your personal info up to date, as well as paying more than the listed minimum payment. When you pay more than you have to in order to pay off balances faster, you save more money on the interest charges, make your credit score look good, and put yourself in a better position to apply for a new loan.  

You're a prime candidate for a credit card limit raise when you just got an income boost — like a promotion or a new side job. Income growth shows your credit card issuer that you have greater financial security and can afford to pay for more, Chase notes. Besides, if you habitually make on-time payments, never max out any card, and your credit score is in the excellent range, your request for a higher credit card limit is more likely to be approved. Paying 30 days or more past due can drop your credit score by over 100 points and may remain on your credit reports for up to seven years, so if you want to get an extended credit limit at any point in your life — never miss a payment.

Additionally, according to The Balance, limits vary according to your credit history, debt-to-income ratio, how much credit you have currently, and how much you make, so you won't know how much extra room you'll get until your application is complete. If your final limit is lower than you expected, you can make a request for more. If you repeatedly fail to make your payments on time (with other credit cards as well), have just transitioned to a lower-paying job, or recently applied for a new line of credit with another creditor, you might want to wait until things look up financially to start requesting an increase.

When you apply for a loan to buy a home or a car, your lender will look at your credit score — typically falling within a range of 300 to 850 — to assess your loan qualification, credit limit, and interest rate. A higher score boosts the lender's confidence that you will repay your debts on time, which usually results in greater borrowing power and lower interest rates. According to credit score provider FICO, a credit score around 670 or higher is good, giving you a better chance of getting loan approvals at more favorable terms. So, building your credit score is a crucial step towards long-term financial freedom, and a higher credit card limit can help by lowering your utilization.

Your credit utilization ratio is basically how much of your available credit you're actually using, and it is often expressed as a percentage. The lower it is — which means you're not an overspender — the better, NerdWallet points out. The rule of thumb is to not use more than 30% of your credit limit. For instance, if you have a credit card with a $5,000 limit that carries a $3,000 balance, that works out to a credit utilization ratio of 60% — which makes you look risky. However, if your credit card limit is raised to $10,000 and your spending habits remain the same, your credit utilization would be lowered to the sweet spot of 30%.

Having access to a higher credit limit means you can make larger purchases and have more funds for a rainy day, per HDFC Bank. Cash is king, and you don't want to spend all of your available money on one big bill. For instance, you can charge your hefty tuition, home renovation, medical bills, or travel tickets on a credit card. No matter how financially savvy you are, you'll encounter issues that were not planned for in your budget. A higher spending amount can help you manage your short-term cash flow and stay on top of your bills. A low credit limit might not suffice to help you solve an urgent financial crisis, and if you have a card with a greater limit, you can make a one-time big purchase without worrying about borrowing money from other sources or obtaining new credit.

Besides, an enhanced credit limit equals better rewards earned from your credit card issuer, such as cashback, rewards points, 0% introductory annual percentage rate, travel protection, and flight upgrades. Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), tells CNBC Select: "Bonus reward points, introductory interest-free repayment periods and cash back can tip the scales in favor of using a credit card if the balance is repaid before standard rates and fees are added."

The biggest disadvantage of a higher credit card limit is that it can pose a debt trap. "With increased credit limit, one might end up spending impulsively, more than they can afford to pay off," warns Sujay Das, MoneyTap's chief risk officer (via Mint). When you don't pay your bill on time, your credit score will take a tumble and it'll be much harder to find good credit options in the future, Das explains. When your credit card usage looks troubling, your credit card issuer can take action to reduce your limit to minimize risks and enhance their ability to lend to other users. A higher spending limit can lure you into leading a lifestyle that you can't afford in the long run. If you're not confident that you can make more payments corresponding to bigger purchases, do not take a higher credit line.

According to Scotiabank, treating credit cards like your lifeline instead of managing different types of debts can also affect your credit mix rating. There are many credit options out there, including credit cards and installment loans. How well you manage a variety of credit types can impact your credit score, so before requesting a credit card limit increase, consult a financial advisor as to which type of credit best suits your needs and conditions.