In the right hands, an increased credit card limit can help improve your FICO credit score by reducing your credit utilization ratio, or credit balances divided by total available debt. In fact, 30% of your score is affected by credit utilization, so there is a case to be made for requesting an increase and not tapping the newly available funds.
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But used the wrong way, a credit limit increase can fan the flames and lead to your racking up more debt.
In the previously recorded Facebook Live video below, Motley Fool analysts Michael Douglass and Nathan Hamilton answer a user-submitted question about credit limits and cover what you need to know.
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Michael Douglass: Daniel asks: "What is the best time to request a credit increase, and does it hurt to request multiple ones at the same time?"
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Nathan Hamilton: Best time -- that's essentially two questions. We'll hit upon both of them. Best time to request a credit increase -- I would ask first off: Why are you asking for the credit increase? I see two scenarios. If you are in debt, and you're asking for a credit increase to possibly charge more to the card and incur high interest charges, I would say there's probably no good time to ask for a credit increase. If his question is more related to FICO scores and how a credit increase could impact his utilization ratio....
Douglass: Let's break that down real quick. Utilization ratio is one of the two biggest things that is considered in your FICO credit score. You want a high credit score because you get better card offers, but you also can get lower mortgage rates, you can also get better auto rates. If Daniel is thinking about six months or a year from now buying a house, buying a car, something like that, then this is a really good time to be thinking about getting that credit increase so you can lower that utilization. Let's talk about utilization and what that is.
Hamilton: Utilization is simply just looking at your credit limits versus how much you're borrowing. If you have $100,000 available credit and you're only borrowing --
Douglass: Wow, that would be a lot.
Hamilton: I know.
Douglass: I don't know how much you make but --
Hamilton: If you're then borrowing only $10,000 of that, you have a 10% utilization ratio. Here's how it plays into the FICO scoring formula: The higher your utilization, the more you're borrowing, the more you're tapping your credit, the lower your credit score is going to be for that. So, FICO wants to see high-quality borrowers that don't take advantage of all the debt that they have at their disposal.
It's a savvy financial behavior. They reward you with a better FICO score. As you look at -- I know we're throwing a bunch of numbers here -- credit utilization as a whole, it impacts 30% of your FICO score. Short of payment history, which accounts for 35%, there's no bigger factor out there, so you've got payment history, credit utilization.
And I would say if you are good -- getting back to his question -- if you are good at managing your finances, if you're paying off your bills monthly, the best time to request a credit increase is whenever you can. Because if you're going to increase your available credit and you're not borrowing more, if you're not increasing your utilization ratio, if you're still carrying the same amount of debt, your credit score is going to improve over time.
Here's a good thing to add on that as well. It is easy to request a credit increase with your card issuer. Many times -- I actually did this a few weeks ago -- I just had to answer two to three questions online with my card issuer, and input the number for what I would like my total available credit limit to be.
A decision was delivered instantly, and at that point you can see where my FICO score could improve over the future just for that simple action. I'm not borrowing more money. I'm not using that credit limit. I'm just requesting an increase to improve my utilization ratio which is actually near zero anyways since I don't really borrow on credit card debt. It just improves your FICO score if you're managing well.
Douglass: I was actually lucky. My credit union actually just gave me a couple of increases.
Hamilton: Did they?
Douglass: I didn't ask. They were just like, "Hey, we're willing to lend you more money." That's good to know. I wasn't using it, but it was very nice. As I became more aware of credit scores and such, it was like this is actually something they're doing to help me, so I appreciate that.
Hamilton: There's two sides of it. They're helping you with utilization, but they're also offering --
Douglass: Hoping that I'll --
Hamilton: To some people to incur interest charges, so I understand where both people are coming from.