October 28, 2022
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Build your credit

Credit Limit Increase Cons

Does increasing your credit limit affect your credit score? Here’s everything you need to know 💙

Increasing your credit limit can have positive effects when managed correctly 🚀

It can help you get cheaper loans and additional credit in the future, emergency money to help with an unexpected expense, and it could possibly lower your credit utilization (how much credit you’re using compared to the amount of credit you have available to you).

However, there are a few disadvantages of increasing your credit limit you should be aware of. And it’s important to remember that when you increase your credit card limit, you’re increasing the risks of getting into debt.

The circumstances need to be right.

For example, if you’ve recently changed jobs and secured a higher salary or your spending habits have changed, then increasing your credit limit isn’t so bad because you know you’ll have the funds to pay back what you owe.

On the other hand, if your income hasn’t changed and your spending habits aren’t great, increasing your credit limit probably isn’t the best idea as you’re giving yourself the opportunity to spend beyond your means.

It’s time for some tough love: you should only ask for an increase in credit if you’re confident you won’t overspend and you’re able to pay the lender back on time 💵

Chelsea Peretti Eye Roll GIF by Brooklyn Nine-Nine

So, get your notebook ready...

What is a credit limit?

In a nutshell, a credit limit is the maximum amount your credit card lender will let you borrow. Any amount you spend from this limit changes your available credit.

For example, if you have a credit card with a $2,000 limit and you’ve used it to spend $500 (hopefully not all on PSL’s 👀), your available credit will drop to $1,500.

If you make the repayment in full, your available credit will increase back up to $2,000, providing the repayment is made on time and no interest has been added.

Credit card limit increase cons

According to GoBankingRates, 14 million Americans have over $10,000 of credit card debt and a separate survey found that 15% of Americans have been in credit card debt for 15 years.

Credit limit increases are often advertised as an easy way to help boost your credit score but if you spend beyond your means, you could potentially dig your way into debt.

You could end up paying a load of interest to the credit card company each month, making it harder to chip away at the original amount owed.

To avoid being caught in the debt trap, here are three things you need to know before applying for a credit limit increase.

📉 #1 Hard inquiry on your credit report

Before a lender can make a decision about a credit limit increase, they’ll need to check a few credit things to see if you’re eligible. Because of this, you may have a hard inquiry added to your credit report which could temporarily lower your credit score.

How long do hard inquiries stay on your credit report?

If a hard inquiry is added to your credit report, it could affect your credit score by five and 10 points for up to one year, and it could also stay for a further year on your credit report.

If you wanna find out how your credit limit is determined and what checks are carried out, keep scrolling 💙

📉 #2 Risk of rejection

No one likes being rejected. Just like that time in elementary school when you ask the popular kid out and they say "eww no, you've got cooties."

Traumatizing stuff.

Even though your lender might have said you’re eligible to apply for a credit increase, it doesn’t automatically mean your application will be accepted. Rude.

And if your application is rejected and a hard inquiry was made by the card issuer, as mentioned up there ⬆️, your credit score could take a hit.

📉 #3 Debt trap

If you’re wondering “should I increase my credit limit”, think about whether increasing your limit might tempt you into unnecessary spending sprees.

Often when increasing your credit limit, it can give you a false sense of security, you believe you’re secure because you have $10,000 in credit but actually, it’s quite the opposite.

That. isn't. your. money.

You could find yourself loosing track of how much you’re spending and before you know it, you’ve spent $1,000 on cozy Fall candles. And if you don’t pay the $1,000 back on time, you’ll end up racking up interest.

Credit card interest is ultimately the amount it costs to borrow money from a lender which is shown as the annual percentage rate (APR). And if your balance isn’t paid in full each billing cycle, it’s sure as hell coming for you 👻

Try to make sure you don’t spend more than you can pay off in a month to avoid those pesky interest charges. Make a budget and stay organized 💅

PSA: If you want to check your credit report before applying for an increase, the Fair Credit Reporting Act gives you access to one free copy of your report from each of the three major consumer credit bureaus every 12 months.

You might also wanna try Cleo Plus. Cleo will give you your full credit report directly in the app, and she’ll give you the steps you need to take to manage your money in a way that can help improve your score 💡

Check out our blog post ‘Is Cleo Plus Worth It?’ for more info

How your credit limit is determined

Credit limits are set by lenders and can vary depending on a number of factors – all of which determine your capacity to make the payments on time.

If you’ve just started building your credit history, your average credit card limit is likely to be between $2,000 to $2,500, according to CNBC.

On the other hand, if you’ve taken out financial products such as loans and credit cards previously and kept on top of the payments, you’re likely to see a higher credit limit.

When a lender is determining how much increase you can get, the main factors taken into consideration are:

💰 Creditworthiness – how reliable you’ve been with paying money back in the past

💰 Payment history – this is a record of all your past payments and whether they were paid back on time or late. Any missed payments will also be flagged

💰 Income and expenses – lenders ask to see your income and expenses. This is so they can calculate your debt-to-income ratio to determine your ability to manage the monthly repayments you plan to borrow

💰 Credit utilization – how much credit you’re using compared to the amount of credit you have available to you. Lowering your utilization rate is something that could improve your credit score quickly

Ultimately, if you keep making payments on time and you maintain a low credit utilization, you should see your credit limit increase over time.

To summarize 🗒️

Think carefully before increasing your credit limit. It’s very easy to overspend and it can take a long time to build your credit back.

Check your Cleo budget (or boring Excel spreadsheet doc) and have a look at your spending habits before you make a decision.

And if you know how to spend responsibly and have good credit, you shouldn’t have an issue increasing your credit limits, and in return, you’ll gain more financial flexibility.

And if you’re wondering how to build credit without a credit card, here’s how to build credit history with Cleo’s Credit Builder Card.

Enjoy this post? Give it a share or send it along to a friend. You never know, it could make a big difference. And of course, if you want to try the best money app in the world for free, just hit this link right here.

Big love. Cleo 💙

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