For those who use credit, having a high limit is important. You want to have as much access to capital as possible so that you can purchase what you need to purchase. So paying off your debt with regularity will increase the odds that creditors will increase your credit limit to give you the margin you need.
For some people, having a high credit limit is also a status symbol. It’s a sign that they are doing well financially and that credit card companies trust them to use their products responsibly. That may seem like a shallow reason but many people view their credit limits this way. But even if you don’t care about status symbols, there are plenty of good reasons experts say to increase your credit limit.
Whether you’re trying to improve your credit score or simply want more financial flexibility, an increased credit limit can be beneficial. Here are five benefits you can enjoy with an increased credit limit.
You Can Improve Your Credit Score
One significant factor that goes into calculating your credit score is your credit utilization ratio. This ratio is determined by dividing your total outstanding credit card balances by your total credit limits. If you have a credit limit of $5,000 and currently owe $2,500, your credit utilization ratio would be 50%.
Ideally, you want to keep your credit utilization ratio below 30%, but the lower it is, the better. One way to lower your credit utilization ratio is to increase credit limit. If you increase your credit limit from $5,000 to $10,000 and keep your outstanding balances the same, your credit utilization ratio will drop to 25%.
Of course, you don’t want to rack up more debt just to increase your credit limit and lower your credit utilization ratio. But if you have the opportunity to increase your credit limit without increasing your balances, it can be a helpful way to improve your credit score.
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You’ll Have More Financial Flexibility
Another benefit of having a higher credit limit is that it gives you more financial flexibility.
If you unexpectedly need to make a large purchase or have an emergency expense, you’ll have more room on your credit card to cover the cost. But even if you don’t have an emergency, a higher credit limit can give you more flexibility to make impulse purchases without straining your budget.
Just be sure to use your increased credit limit responsibly and only spend what you can afford to pay back. The more financial flexibility you have, the better. But it’s especially helpful if you travel frequently or have an irregular income.
With a higher credit limit, you’ll have an easier time covering unexpected expenses when they come up.
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You Can Avoid Overdraft Fees
If you have a checking account linked to your credit card, an increased credit limit can help you avoid overdraft fees.
For example, if you have a balance of $0 in your checking account and you try to make a purchase that costs $100, your bank will likely approve the transaction and charge you an overdraft fee. But if you have a credit card with a limit of at least $100, the transaction will go through without triggering an overdraft fee.
Of course, you’ll still have to pay back the credit card debt plus interest and fees. But avoiding overdraft fees can save you significant money in the long run.
If you have a checking account with a high-interest rate, an increased credit limit can help you avoid accruing too much debt. Just be sure to keep your balances low and make regular payments on time to avoid damaging your credit score.
You Can Earn More Rewards
If you have a rewards credit card, an increased credit limit can help you earn more rewards. That’s because most rewards credit cards give you more points, miles, or cash back when you spend more money.
For example, if you have a credit card that gives you 1 point for every $1 spent, you’ll earn 2 points per $1 spent once you reach your credit limit. So, if you spend $10,000 a month, you’ll earn 20,000 points. But if your credit limit is only $5,000, you’ll only earn 10,000 points.
Rewards credit cards can be a great way to save money on travel or earn cash back on your everyday purchases. And if you increase your credit limit, you can earn even more rewards.
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You Can Get a Lower Interest Rate
If you have a good or excellent credit score, you may be able to negotiate a lower interest rate with your credit card issuer. And if you have a higher credit limit, you’ll be able to borrow more money at that lower interest rate.
For example, let’s say you have a credit card with an 18% interest rate and a $5,000 credit limit. If you carry a balance of $1,000, you’ll accrue $180 in interest charges every year. But if you increase your credit limit to $10,000 and keep your balance at $1,000, you’ll only accrue $90 in interest charges yearly.
A lower interest rate can save you significant money in the long run. So if you have good or excellent credit, it’s worth asking your credit card issuer for a lower rate. You may be surprised at how much you can save.
Final Thoughts
Increasing your credit limit can have a lot of benefits. But it’s important to remember that a higher credit limit also means more responsibility. So if you increase your credit limit, be sure to use your credit card responsibly and only spend what you can afford to pay back. That way, you can enjoy all the benefits of a higher credit limit without damaging your credit score.
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