credit limitsIf you have a credit card or line of credit, you may be familiar with the term credit limit. Although most people know that a credit limit is the maximum amount you can spend on a credit account, they may not understand how a credit limit impacts their credit scores. Below we detail exactly that and explain how you can potentially increase your credit limit.

How your credit limits affect your credit scores

Your credit limit impacts so much more than how much you can spend on a credit card or line of credit, as it directly influences your credit utilization ratio, which accounts for 30% of your scores. Your credit utilization ratio determines how much of your credit limits you’re using — creditors prefer to see you use under 30% of your credit limits — which is why your credit limit is such a big deal. You can calculate your credit utilization ratio by dividing your total used credit (or what you owe) by your total credit limits. For example, if you have two credit cards (one with a $50 balance and a $300 credit limit and another with a $200 balance and a $1,000 credit limit), you would divide $350 by $1,200 to get a credit utilization ratio of 29%, which means you’re using 29% of your credit limits.

How can I raise my credit limit?

Since your credit limits have a direct relationship with your credit scores, increasing your credit limits will help lower your credit utilization ratio and boost your credit scores. Here are some of the ways you can increase your credit limits.

Pay off debt. One of the easiest ways to increase your credit utilization ratio is to pay off debt because it’ll free up more of your credit limits. Since this isn’t always as easy as it sounds, you may want to check out our guide to pay off credit card debt to learn about some of the options to have to rid yourself of debt.

Ask for a higher credit limit. Similar to what we suggested when your balance transfer credit limit is too low, you can always just pick up the phone and ask your credit card issuer if your credit limit can be increased — after all, the squeakiest wheel gets the grease, right? That said, there are a couple things to keep in mind. First, if the credit card is maxed out, you may not qualify for a credit limit, as the credit issuer usually isn’t willing to raise the limit for someone who owes them a large sum of money. Second, you should know that a lender may check your credit history to see if you qualify for an increase, which means a hard inquiry may appear on your credit reports — note that some lenders will opt for a soft inquiry and use your payment history with the issuer to help make their decision. Finally, if your card is brand new, you may not qualify for a credit increase because the credit issuer just evaluated your financial status to approve you for the card and assign you a credit limit, so unless there has been a major change with your finances since you applied for the card, it’s likely not worth your time. Something else to note is that you do not want to request a credit increase for all of your credit cards because you may end up with multiple hard inquiries on your credit reports, which will have a negative impact on your credit scores and make you look financially insecure. If you need substantially more credit, it might make more sense to just apply for a new card, which brings us to our next point.

Consider opening a new credit card. Applying for a new card is a great way to decrease your credit utilization ratio because your new credit limit will probably be bigger than any one credit limit increase you could request at a given time. As long as you make sure to use the new card responsibly, meaning you make on-time payments and don’t max out the card, it can have a stronger positive impact on your credit. What’s more, you can choose a card that earns rewards on your purchases — some cards earn cash back rewards, while others earn travel rewards — which will help make the most of all your purchases. If you’re carrying a credit card balance that you want to pay off, you may want to consider a balance transfer credit card, which can have some positive impacts on your credit, or if you plan to make a large purchase, you can opt for a 0% intro APR card so you have some time to pay off the purchase interest-free. There is a credit card for every lifestyle, so you should be able to find one that fits your needs. Visit our credit card reviews to learn more about the options.

For more information about how to build and maintain your credit scores, keep reading our credit monitoring blog.