What is a Credit Limit?
Your credit limit is what your credit card issuer has set as the maximum amount you can technically borrow by charging to a single credit card account. That’s quite straightforward and doesn’t require too much explanation. So, I guess the question would be: “What happens if you exhaust or even exceed that credit limit?”
Normally, if you exceed the credit limit, your card issuer will just simply decline or disapprove the transaction.
Some card issuers may allow you to charge beyond your limit but will charge you an over-limit fee of up to $25 the first time you go over and up to $35 if you do it again within a six-month period. The catch is, the card issuer cannot charge an over-limit fee unless you have expressly agreed to allow the over-limit fee on your card.
Take note that using your card beyond your limit may come with other consequences for you. For one, the card issuer may decide to bring down your credit limit if you’re a habitual offender. They can also ask you to pay a higher minimum payment because you’ll have to pay in full the amount that you spent over your limit together with the minimum amount due.
How Do Credit Card Issuers Set The Credit Limit?
In the credit limit evaluation process, the credit card issuer will gauge your credit history, income, and your current total debts. From these factors, they will be able to set your credit limit. The rule is, the better your credit history, the more likely you’ll get a higher limit.
Here’s the good news: your credit limit can also go the other way. In some cases, in your spend responsibly and historically pay off your balance early or on time, the card issuer will conclude that you are a low-risk customer and automatically increase your credit limit even if you don’t make such a request.
But this is the exception rather than the rule. Many card companies will not automatically increase your credit limit. If you want to increase your credit limit, you might have to do some negotiating. This requires that you call your card issuer and explain to their representative why you need an increase in your limit and convince him that you deserve one.
Things To Consider Before Approaching
Before deciding to do the last step, it’s better to consider the following steps, especially if your credit score isn’t excellent:
1. Automatic Credit Limit Increase
There are card issuers that will increase your credit limit as you demonstrate that you are a responsible credit card holder. It could mean that you do not exhaust your total credit limit and you make your payments adequately and on time every month.
Many credit card issuers have a system that reviews all the accounts regularly and triggers a raise in the credit limit of cardholders who meet their criteria.
2. Any Increase in Credit Limit May Affect Your Credit Score
A credit line increase is actually good for your credit score because many times, it can benefit your score.
How? If the card company raises your credit limit and you keep your usage as it was before the increase, you will effectively shrink the utilization ratio. That should boost your score – provided that you don’t use up the additional credit as debt.
Card issuers will normally keep tabs of how much credit you already have at your disposal, and how long it would take you to pay the balance in case you max out all of your credit lines.
Card issuers also work according to their own set limits for each account category so they won’t give astronomical credit limits to every cardholder. The defining factor is largely a person’s income and assets and a good credit history and score sometimes take the backseat. So if your issuer gives you an additional $3,000 to your credit card limit, that’s $3,000 new credit that you might find hard to get from other card issuers.
Here’s a piece of advice: If you want to request for a credit line increase, pick the one card which you have the best payment history.
Don’t ever do a request simultaneously on several cards because that communicates desperation. Issuers might consider you a risky account and all of them might turn you down altogether.
3. Understand Your Situation
Card companies may find it easier to give small limit increases but for large limit increases, they would not grant anything without due diligence. But before you grab your phone and start calling your card issuer, here are four important things to remember before asking for a credit limit increase.
Check The Overall Condition Of Your Credit Report
Get a copy of your credit report and review if all the information in there is accurate. If there is an erroneous entry, you can send a dispute letter so that the credit agency can investigate and make a correction. While you can use this tool to dispute information on the report, you need to make sure that you correct the mistake on all three of your credit reports. Issuers consider late payments as a sign of risk so keep all your accounts up to date. Look over your credit report to see if there is anything that would lessen your chances of approval. If you see an error and you initiate steps to correct it, it will take around 2 months. So wait until they’ve cleaned it up before you apply.
Pay particular attention to your credit use. For every card that you hold, take note of your credit line and examine how much of it do you use every cycle. It doesn’t really matter if you pay it off on your due date – you’re trying to establish usage. More specifically, you’re trying to get your credit utilization ratio. The less you use credit, the higher your credit score. Here’s the drill: add up all your credit card lines and your total usage for all cards then compare the two figures. They will use the same method when they compute for your credit score.
Check If Your Income Is Enough To Pay For Your Debts
Lenders will definitely want to look at your debt to income ratio or how much debt you owe in relation to how much money you make. This will tell them if you have the ability to comfortably have more debt and not run the risk of default.
You must show that you have a steady and stable income source, so you have to make sure that your employment and income are accurate and sufficient.
Mind Your Debts And Credit Card Spending
Card issuers seriously look at how you manage your money and debts by looking at your debt and spending history. And do take note that they don’t just concern themselves with how much you owe them but how much you owe from all your lenders.
Paint A Nice Payment History Picture
Perhaps one area in your credit report that calls the bigger attention of lenders is your payment history. They want to know if you are able to manage your debts well by paying enough and on time. View your payment history from the perspective of the card issuer to get a better appreciation of the process.
Have you had any late payments in the past six to twelve months? If the answer is yes, then they would probably say “No”. Did you make only the minimum payments in the last six months? The same thing, better postpone your request.
Do You Really Need That Much More Credit?
When it comes to debts, whether getting a new credit card or simply asking for additional credit on your card, you need to determine exactly how much more credit you need.
Do some computations and settle the figure of how much additional debt you can afford before you talk with the credit card company. They would offer you whatever they can offer you.
Just be cautious. Don’t allow a larger limit to drive you into buying things you don’t need. You might overspend and bury yourself in debt.
Credit Limit Increase Fees
You should know that some banks will collect a fee when they increase your credit limit. For example, the Credit One Bank Visa Platinum credit card can charge up to $49 when you request for an increase in your limit.
The First Premier Bankcard charges 25% of the increase every time you get an approval for a credit limit increase. If you have one of these cards or a similar card, forget about asking for a credit limit increase and try with a more appropriate card as soon as you’re ready.
Credit Limit Increase – Tips For Success
While the issuer decision will mainly rely on your financial situation, there are a couple of steps you can take in order to increase the chance of success:
Prepare All The Documents You Will Need
As we’ve mentioned previously, your card issuer would want to know your current annual income, your employment status, how much you pay monthly for your housing loan, etc. Have this information and the relevant documents ready before you place your call.
You read it correctly: call. We know that your card issuer would probably have an online facility to request for a line increase but you’ll have a better opportunity to present your supporting information if you can speak to a live representative over the phone.
If you talk to a warm body from the card company, you’ll be able to ask all the questions you want. What more, the representative might be able to approve a certain amount of additional credit without having to go through a hard inquiry (and that works to your advantage).
Have a Good Convincing Reason
Before you apply for any increase, you should have already settled the reason why you want or need it. You should be able to confidently say that you are handling your current debts comfortably and responsibly.
It’s not about just being able to make the monthly minimum but being able to pay in full or slightly less. You should only ask if you can pay your balance in full every month at your current income. Don’t apply for an increase if you’re planning to use the extra credit to make ends meet or you’re hoping that your income will somehow rise in the next few months.
Ask For a Reasonable Increase – Don’t Be Too Aggressive
Don’t ask for a huge increase but be a little conservative. The credit card companies follow their own guidelines in handling credit limit increase requests. Ultimately, they will have to base their decision on your credit plus the kind and amount of increase that you ask for.
How much should you ask? Around 10% to about 25% would be a nice amount, as a general rule. If you shoot for the moon and get a rejection, you would probably have to wait for two or three months before they can act again on another request from you. Don’t forget that every time you make a request, you also trigger a credit-deflating inquiry into your account.
Prepare Your Case Well
Experts advise that you stick to the basics when asking for a credit limit increase. Just keep it simple and straightforward – those who will evaluate your request will appreciate a terse request.
Here are some other tips on how to present your case:
- Have your notes and talking points handy, such as how much you are asking and your justification for asking it.
- List down your questions and get answers – before committing to the request. Make sure that everything is already clear to you before you close talk. Ask the things they don’t tell you in their website like, “Can I ask another increase later?” or “Will this request trigger a hard inquiry on my credit report?”
- Keep your cool and patiently explain your reason for the request. Be polite and keep calm when things don’t go as you expect or even if the representative becomes difficult to deal with. You can stop the call and try again later – with some luck, you might get a different but much nicer representative.
- If they say ‘No’, find out why. It will help a lot to know exactly why they declined to grant you an increase so you can begin to work on it and increase your chances later. For example, they might see that you’re saddled with many high balances and consider you high risk. You can create a repayment plan to retire most, if not all of them. Once you improve your situation, you can have a go at it again.
Even before you talk to the representative, the conditions that will merit approval or disapproval will already be there. What you say may not matter at all in terms of increasing your chances if you have a low credit score, poor payment history, or adverse findings on your report. Nevertheless, saying the right things might overturn some negative perceptions about you.
Be Rational, No Desperate
If you call the card company with a sad story and a crying voice hoping to appeal to their emotions and make them approve your request, that would not work.
They will not really focus on the reason why you want or need it. They, however, will listen if you tell them why you deserve it. Here are some samples why:
- You have been a loyal customer for X number of years/months and you have never missed a payment. Make sure that you been a customer for more than six months.
- You pay off your balance each month.
- You habitually pay more than the minimum balance each month.
- You’re just using 30% or less of your credit limit.
- You’ve never been late in paying your credit card bill.
- Your income is higher now than a few months ago.
The person on the other end of the line is a person who can help you so keep that in mind. He has a job to do and he is protecting the interest of his company so don’t antagonize him. Being rude will only hurt your case and yelling or cursing at a representative will give them the right to hang up on you. You can imagine what recommendation he will give regarding your request.
The Consequences Of Transfer Credit Card Limits
You can avail of this option but do it very carefully. Many card companies allow the transfer of a card’s credit limit to another credit account only if the company issued both cards. It could be downright laborious and if you don’t do it right, you risk hurting your credit score.
To illustrate, if you hold two different Bank of America credit cards with a credit limit of $3,000 per card, you can transfer $1,500 from the first card’s credit limit to the second card. If, however, after transferring the spending limit over to the second card you decide to close the first card, it will probably impair your credit score.
Pick Only One Card For Your Request
When you request for an increase, the card company will have to check your credit history to see if you deserve a line increase.
Your credit report will reflect this credit pull and will slightly lower your score. However, if multiple card companies begin pulling your report, you can bet that the impact on your score would not be negligible. Aside from that, the different lenders will know that other issuers are reviewing your account as well and that may paint a picture that you are really desperate for more credit. Most will consider this as a red flag and may lessen your chances of getting an approval.
Use a Balance Transfer as a Bargaining Chip
If there’s one switch strategy that banks love to do, it’s to offer a balance transfer option. If you’ve been living under a rock for the past 20 years and don’t know what it is, it’s quite simple. It means the card company will allow you to transfer your existing credit card debt from one card to another.
This scheme is a winner for cardholders because along with the option is the offer of a zero percent interest that can last up to a year or even longer.
As a credit card holder, you won’t have to pay interest for the promotional period if you move your balance from card A to card B. It’s a steal and a good financial move because the interest you don’t have to pay could run to hundreds of dollars.
Why would banks do that
The reason is simple: they can collect a balance transfer fee. So, before you grab this offer, do some pencil pushing and see if you will come out ahead. If the transfer fee is the same or higher than the amount you’d be saving in interest, it’s not a good deal for you.
If you don’t pay the full amount of your balance by the time the zero interest period runs out, your new card will start to charge interest and you’ll end up paying the same interest (or maybe higher) as you would have in your old card.
To use this to your advantage, you have to tell your card company that you are asking for an increase because you want to transfer your balance to this card. They would probably agree to this as long as you’ve shown them that they can trust you to make payments by having an immaculate credit history.
Which One is Better: New Card Vs Limit Increase?
It all depends on your personal situation. If you have an excellent credit report and you’ve faithfully kept all your debt payments up-to-date, you have a great chance of getting approved for a new card. Who knows, the issuer might even give you a higher credit limit than your current credit card?
If your credit is really exceptional, the card company might even enroll you in their rewards program or give you a cash back card plus some perks for your outstanding credit card spending and payment history.
If you are able to get the credit limit increase you ask for, you should try to improve your credit scores by lowering your credit card utilization rate and maintaining a low credit card balance. And keep in mind that having that additional credit at your disposal could lead you to spend wildly. You might end up with more debt than your monthly income can easily handle. If you’re careful with how you use your card, a higher limit will allow you to make large purchases when necessary and you might earn a good amount of rewards while doing so.
Before actually asking for a credit limit increase on your credit card, conscientiously evaluate your financial situation. Do you really need a higher credit limit or is it something that is just borne out of want? Your honest answer to this question will help you decide.
After all, these, if you conclude that it most favorable to you to ask for a credit limit increase, get in touch with your credit card company and present your argument.