Most credit cards come with a ceiling that can, in some cases, keep your credit score from breaking through to new heights. While you don't get to determine the height of the ceiling, you can try to have an influence.
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Somewhere in the mass of numbers printed on your monthly credit card statement is your credit limit. That's your ceiling -- the maximum amount the card issuer has authorized you to charge each month.
To a large extent, the height of that ceiling is out of your control. Your credit card issuer sets your credit limit when it gives you the card, taking into account your credit history, credit score and your income. Issuers can raise or lower your limit at whim -- there are no laws that prevent them from doing so.
The only right you have concerning credit limits is in avoiding over-limit fees. The Credit CARD Act of 2009 prevents card issuers from processing transactions that would put you above your credit limit, and then charging you fees for going over -- unless you have signed up to authorize charges over your credit limit. If you don't opt in to that, your card issuer cannot legally charge you an over-limit fee. The act also prevents issuers from charging you a fee that's more than the amount you went over the limit.
Even though many issuers automatically raise your limit after months of responsible borrowing and repayments, you can also take the matter into your own hands and ask for an increase. Keep in mind that if your card is brand new, your request will probably be ignored until you've established good borrowing behavior.
The right reasons
Before you pick up the phone, ask yourself why you want a higher limit. One good reason is to improve your credit score. Lowering your credit utilization ratio, the percentage of your available credit that you are using, can boost your credit score substantially as credit utilization accounts for a big chunk -- 30 percent -- of your FICO score.
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In general, you should aim to keep your spending far below 30 percent of your credit limit. In other words, if you're spending $1,500 or less a month using a card with a $5,000 limit, you're OK -- though the highest credit scores go to those with spending levels below 10 percent of their limit. The higher you go, the more you need to either cut spending or increase the limit. If you have several cards with varying credit limits, add those limits up and divide your total balances by the sum of all your credit limits to find out how much of your available credit you're using.
For example, if you have two credit cards, one with a $1,000 credit limit and one with a $500 credit limit, your total available credit is $1,500. If you owe $500 on one card and $200 on the other, your total debt is $700. Divide $700 by $1,500 and your total credit utilization is 46 percent -- which is far too high to get the best credit score.
The lower your total credit utilization, the higher your possible FICO score, which is especially beneficial if you're thinking of applying for a mortgage or another big loan in the near future.
Rewards may offer another good reason to boost your credit limit: If you're saving points for, say, a trip to China, a $1,000 a month credit limit will get to you to Shanghai sometime around the next millennium. If you are able to charge more of your regular expenses to the card and pay off the full balance at the end of each month, you'll boost your points-earning potential.
If you're disciplined, a higher credit limit can also provide peace of mind as an emergency cushion. "As you're building credit, every two years or so ask for an increase," says Adri Miller-Heckman, a coach and trainer for financial advisers who is based in Farmington, Conn. Situations change, she points out: A divorce can result in a higher cost of living, or a medical emergency can require some backup funds. "Just to know it's there gives you a sense of comfort," she says.
The wrong reason to ask for an increase? "You're desperate," says Denise Winston, a Bakersfield, Calif.-based personal-finance consultant and author. If you need an increase because you're maxing out every card, every month, "don't even ask," she advises. "You won't get it anyway."
Which leads to the asking part. Applying for a credit-limit increase is just like applying for credit. "They will pull your credit history. They will ask questions. You have to go through the process," she says.
Be prepared for one temporary negative side-effect: Asking for a higher credit limit triggers a hard credit inquiry, which can lower your credit score temporarily. So, "apply for it when you need it, not just when you want it," Winston advises. Assuming it's granted, and you pay the bills on time, your higher credit limit will soon boost your score and more than erase the brief dip.
Ready to make the call the 800 number on the back of your card? Here's what to expect.
The customer-service representative may ask if your financial situation has changed, how long you've been at your current job or how long you've lived in your current house. If your answers to the tough questions indicate that a request for a higher limit is in your best financial interests, here's a guideline for the conversation (printable version: "Script -- how to ask for a credit limit increase").
YOU: Hello, my name is ____ and I'd like to request a higher credit limit on my credit card.
SERVICE REP: Let's see if I can help. May I have your account information and ask why you'd like a higher limit?
YOU: I just learned a little about my credit score and would like to lower my utilization ratio. ("Sound like an educated consumer," Winston says.)
At this point, the service rep might turn down your request.
SERVICE REP: I'm sorry, we're not offering any credit-limit increases now.
YOU: As a company policy? Or to me specifically? You do realize I have many other credit offers. (If it's you specifically, find out why and then get copies of your credit reports, Winston advises.)
If the service rep offers to help:
SERVICE REP: OK. What kind of increase are you looking for?
YOU: I'm not sure. What can I quality for?
SERVICE REP: We can find out. Do you want to start the application process?
YOU: Yes, but can you tell me if an increase will change my interest rate or minimum payment?
Proceed with the application when you know the details and how an increase may or may not affect your account, Winston suggests.
If you do apply for and receive a higher limit, congratulations -- and proceed with caution. "Just because it's available to you doesn't mean you have to spend it," says Miller-Heckman.