You get a message notification from your credit card company. Surprise — they want to increase your limit! Should you take it? Let’s look at the pros and cons before you accept this increase.
Pro: You Have a Bigger Safety Net
A bigger limit gives you more money to spend, plain and simple. Depending on the size of your increase, this change can improve your financial outlook. You might have a huge safety net capable of taking on life’s biggest emergencies, like unexpected household repairs and medical expenses.
Con: You Might Overspend
For people who struggle to keep their spending in check, a bigger limit can cause them to spend more than they can afford.
Denying your increase won’t limit your safety net. If something comes along that costs more than your old credit limit can handle, you can always rely on direct deposit loans as a backup.
You can find direct deposit loans that are termed loans, meaning they issue a pre-determined amount that you must pay back by a specific schedule. This structure makes it impossible to borrow more than your initial loan amount without reapplying.
For more information on direct deposit loans, you can check out a website like MoneyKey to explore the details. Generally speaking, termed direct deposit loans may be an alternative to revolving credit if you’re worried about overspending.
Pro: It May Improve Your Credit Score
Most (but not all) credit cards contribute to your credit history in the form of your credit utilization rate. It’s one of the five factors involved in your score, although some credit bureaus have begun to include alternative data points.
Your utilization rate shows how much of your available limit you use at any given time. You can calculate it by dividing your outstanding balance by your maximum limit. You want to keep this percentage low for good credit, ideally below 10% at any given time.
Since it’s a ratio, your utilization rate represents the interplay between your balance and limit. Paying off your balance is the best way to lower your utilization ratio. However, you may also affect your ratio by increasing your limit.
Con: It May Lower Your Credit Score
On the flip side of your utilization rate, an increase can be detrimental to your score. If you have a hard time spending within your limits, you can ring up a huge balance that you can’t pay off. Carrying over a bigger balance will lower your utilization ratio and possibly make your score drop.
Pro: It’s Easy
When your credit card company suggests a limit increase, accepting it is easy. In many cases, you can log on to your account and click a button, and in a few days, you will receive official confirmation that your account has been increased.
Con: It Comes with Interest
Nearly every personal loan comes with interest. Unless you’re one of the lucky few borrowers who snag a 0% APR, you will have to pay interest and finance charges on top of your principal.
With credit cards, your interest depends on how much you draw and how often you carry over a balance.
Your credit card accrues these fees any time you carry over a balance — even if you don’t make additional draws against your limit. This means you stand to pay more for these draws the longer it takes you to pay off your balance.
The Takeaway:
Increasing your limit has advantages, but don’t overlook the disadvantages before accepting anything.
