The Benefits of Credit Limits
Knowing your credit score is important for many things. It’s more than just a number. Your credit score is a critical piece of financial information that impacts your ability to borrow, rent, or even get insurance.
One of the key factors included in a credit score is called “credit utilization.”
Credit utilization is the percentage of what you currently owe divided by your credit limits. Credit bureaus look at your total utilization. For example, let’s say you have a total of $10,000 in combined credit available to you on all of your credit cards and revolving accounts. And, you are carrying a balance of $7,000 on those accounts. Your credit utilization is 70%. Most creditors look at anything over 30% utilization as too high.
For new borrowers, starting small and managing credit is always a good strategy. But as you become more money savvy, an increase in your credit limit may be a good thing, as long as it’s used wisely.
You can lower your credit utilization by requesting an increase to your current credit limits. But this should be done with caution.
Having access to more money when needed doesn’t mean you should charge away and take on more debt. If managed sensibly, having a larger credit limit can be a convenient way to make large purchases. It can also be a great source of immediate funds in case of an emergency.
Helps Lower Credit Utilization
An increased limit can help improve your credit utilization ratio and may improve your credit score. In the example above, let’s say your available credit limit goes to $20,000 and you stay at $7,000 used, your ratio is cut in half dropping to 35%.
Other Credit Factors
Credit utilization is just one factor in determining your credit score. It’s an important one, though, as it makes up about 30% of the score. Others include:
- Payment history: This is the MOST important factor. Paying your bills on time. Late or missed payments can have a major impact on your score.
- Credit history: How long you have had credit.
- Credit mix: Different types of credit like credit cards and revolving accounts, loans, mortgages etc.
- New credit: Opening many accounts too quickly.
If your credit is good, it might be the right time to consider a credit limit increase. While some credit card issuers automatically increase your credit limit when they feel you are a good risk, others – like Pyramid -- will only raise it when you ask.