Lenders look at certain things to determine your creditworthiness. Credit limits are based on those criteria. If the credit limit on a credit card is lower than you’d like it to be, understanding why the current limit was set can help you take steps to increase it.
Why Is My Credit Limit So Low?
Low credit scores and a short credit history are two of the main reasons you may have a low credit limit. Multiple cards with high balances or a low income will also influence your credit limit. Some cards, such as those issued by retail stores, have the same low limit for every user.
While a low credit limit is in place to help you manage your spending, that doesn’t mean you should max out the card. Remember that credit utilization, which is your outstanding debt relative to your credit limit, has a powerful impact on your credit score. Lenders like to see a credit utilization rate of 30% or lower.
For example, if your credit card has a limit of $2,000 and your outstanding balance is $1,900, your credit utilization rate is 95%, which will negatively impact your credit score. (The credit utilization formula: Take your outstanding balance and divide it by the credit limit and then multiply by 100.)
Benefits of a Low-Limit Credit Card
On the bright side: Even a credit card with a low limit can be beneficial to your overall credit score. For example, when you use the card regularly and make your payments on time, you’ll build up your payment history while keeping your outstanding debt in control. Both factors — payment history and outstanding debt — directly impact your credit score.
How To Increase Your Credit Limit
While it’s best to wait until you’ve had a card for at least a year and have established a timely payment history before you ask for a credit increase, the request process is usually quick and easy. Oftentimes, you can complete the request on the issuer’s website or smartphone app in lieu of making a phone call.
When you request a credit increase, the issuer will ask you to provide information about your employment status, income, rent or mortgage, and outstanding debts. Always tell the truth.
Because the request process has been automated, your “yes” or “no” answer usually comes right away, unless there’s a need to further verify something, such as a new address.
Beware of Hard Inquiries
A request to increase your credit limit will sometimes require a hard credit inquiry, which is when a lender pulls your credit report and score from one or more of the major credit bureaus to determine your risk level. A hard inquiry can stay on your credit report for two years, and each one could reduce your credit score several points in the short term.
Be strategic with requesting credit limit increases to reduce the number of hard inquiries and the negative impact to your overall credit score.
Reap the Rewards
While requesting a credit limit increase may initially cause a dip in your credit score, the longer-term benefits can make the short-term hit worth it.
When you have more available credit and use it responsibly, you can decrease your overall credit utilization. In addition, making payments on time can bolster your payment history. Demonstrate your creditworthiness to a lender, and watch your credit limits rise.