Trying to find an ethical and effective way to improve your credit scores can sometimes be a rather frustrating undertaking. After all, improving your credit often takes time or money; two things you may not have readily available depending on your personal situation.
The good news, however, is that there are also some out-of-the-box methods to improve your credit score that you may not have considered. One such tactic is to increase your credit limit.
Revolving Utilization and Your Credit Scores
Credit scoring models, like FICO and VantageScore, are designed to consider how you manage your credit card accounts. In fact, both of these scoring platforms base about one-third of the points in your credit scores on debt related measurements. A significant portion of these measurements is your revolving utilization ratio.
If you’ve never heard the term revolving utilization ratio before, there’s no need to worry. It’s a term that’s not often used outside of the credit industry. Revolving utilization ratio refers to the relationship between your credit card limits and your credit card balances.
Understanding how your revolving utilization ratio is calculated is relatively simple. Here’s a quick example:
If you have a credit card with a $1,000 limit, and you owe $500, then your revolving utilization ratio will be 50% –because you have “utilized” half of your credit limit. If you were to pay down the balance on that same card to $100, then your utilization ratio would fall to 10%. If you were to max out the same credit card account and charge your balance up to $1,000, then your ratio would climb to 100%.
The lower you can get that percentage, the better it’s going to be for your credit scores.
Why a Credit Limit Increase Might Help
What I just explained above is simple math — a division problem, if you will. If you want to be rewarded with higher credit scores, then keeping a low revolving utilization ratio on your credit card accounts is important. When you incur large balances on your credit cards, your credit scores are almost guaranteed to suffer as your balance grows. This fact is true even if you make every single monthly credit card payment on time.
The easiest way to lower your revolving utilization ratio is to write a big check. In other words, paying off your credit card balances is generally a fast way to raise your credit score. However, if you can’t afford to simply pay off your credit card balances, then another way to lower your revolving utilization ratio is to change the other part of that mathematical equation – by asking for a credit limit increase.
In the scenario above, you saw how a $500 balance on a $1,000 credit card equaled a revolving utilization ratio of 50% (not so great for your credit scores). If you were able to increase the limit on the aforementioned account to $2,000, then your revolving utilization ratio would immediately fall from 50% down to 25% — a percentage that’s much better for your credit scores.
So, as you can see, a credit limit increase offers you another potential way to improve your credit scores quickly and without spending a dime.
But, There’s a Catch
Requesting a credit limit increase on your credit card accounts can often be a positive move for your credit scores. Yet there are a few potential issues you should keep in mind before you give your credit card issuer a call.
1. Potential Inquiries
Your credit card issuer might pull your credit report whenever you apply for a limit increase on your account. While a single credit inquiry probably isn’t going to have much of an impact on your credit score, there’s at least the potential that having your credit pulled could have a negative effect.
2. Avoid Temptation
A higher credit limit isn’t a license to go shopping. The point of the increase is to lower your utilization rate and increase your credit scores. Spending into your new, higher credit limit defeats the purpose and will only make it harder to improve your scores. If you know you don’t have the self-control to avoid overspending, then it’s probably not a good idea to ask for a credit limit increase.