Once you get into the swing of using a credit card to improve your credit score, it can be easy to find good places to make credit card purchases. Anything from groceries, to filling up on gas, and even some bills can be paid with a credit card. As long as you meet your minimum monthly payment, avoid going over your credit limit, and don’t carry too much of a balance, these are great ways to build credit.
However, if you’re putting this kind of use on your credit card, then you’ve probably become acutely aware of your credit limit. A credit limit (also known as a credit line) indicates how much money your credit card company is willing to lend you each month. For many cardholders, this limit never comes into play because they keep their credit utilization low. However, if you’re working on becoming a credit card power user to build your credit, or you’re ramping up to a big purchase, having a low credit limit can be a major limiting factor.
The good news is that credit limits are not fixed. You can negotiate with your credit card company to get the credit limit that’s right for you.
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How Credit Limits Are Decided
When you open a credit card account, you are assigned a credit limit. Although it may have seemed random at the time, this limit was actually carefully crafted by your credit card company based on your financial background.
In general, credit card companies make money by lending to borrowers who have a track record of paying off debt in a timely fashion and possess a provable means of paying off current and future debts. In plain English, this means that your credit card company would really prefer that you have a high credit score and a stable job that pays well. If you were assigned a lower credit limit than you would like, this is probably because your credit score was low or you didn’t have enough credit history to tell your credit card company the full story on how responsible you are with debt.
You Can Negotiate Your Credit Limit
Your credit limit may have started lower than you would’ve liked, but it doesn’t have to stay that way. You can negotiate your credit limit with your credit card company as long as you have the right bargaining position.
There are two events in your financial life that can trigger this kind of negotiation on your part. The first is getting a raise or a higher-paying job. Having access to additional income will instantly boost your ability to pay your credit card bills, incentivizing your credit card company to let you borrow more each billing cycle.
When you negotiate your credit limit, lenders take a look at specific things, and more income is a sure way of receiving a higher credit limit because they associate your higher income with a higher likelihood for repayment.
The second way to put yourself in the right position for negotiating your credit limit is if your credit score has improved dramatically since your limit was decided. By using your credit card correctly and keeping up on your payments, and by getting rid of bad credit habits, you have proven to your credit card company that you can handle the responsibility of a higher credit limit. This will give you a great bargaining position going into your credit limit negotiation.
When to Increase Your Credit Limit
There are several benefits to negotiating a new credit limit on your existing card.
- You can reach a better credit card utilization level without changing your spending habits. Even if you don’t max out your card from month to month, running a high utilization can still have a negative effect on your credit score. By increasing your credit limit, you can improve utilization while keeping up the same level of spending.
- You can accommodate a new authorized user on your credit card account without limiting your own spending. If you are considering adding your spouse or a family member to your credit card account, you will probably need a higher credit limit to account for their additional spending.
- You can hang on to an old credit card. Having a credit card account with a long history can do great things for your credit score. If you’re unsatisfied with the terms for your existing card, it’s better to try renegotiating them before you think about ditching the card.
Is There a Downside to Negotiating Your Credit Limit?
It might seem like a good idea to hit your credit card company up every month and see if they’re ready to raise your credit limit. The worst that can happen is them saying no, right?
Whenever you call your credit card company to negotiate your credit limit, they will either perform a soft or a hard inquiry on your credit report. Too many hard inquiries on your report — over a short period of time — can actually cause your credit score to go down, giving you a worse negotiating position the next time you come back to negotiate your credit limit.
Negotiating for a higher credit limit can be great for you. Having a higher credit limit will allow you to use your card more often to build credit that gives you the resources necessary to make big purchases. Make sure that you have the best bargaining position possible with a good job and a high credit score before you ask your credit card company about raising your credit limit.
How to Increase Credit Limit
Some credit card issuers will automatically (and gradually) increase your credit limit over time as you prove that you are more creditworthy, and others will make you go through the process intentionally.
If you need to go through the process manually, you can do so by taking advantage of your bank’s online banking, mobile banking, or by calling the toll-free number on the back of your credit carding and following the automated voice message instructions on how to do so.
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