Consumers who are trying to improve their credit rating are often advised to increase the credit limit on their credit cards. A key factor in your score on a credit report is your credit utilization rate, which takes into account the amount of available credit being used. If the debt-to-credit ratio is lower, the score for that part of the credit report is higher. Although a higher credit limit can increase your credit score, be careful when increasing credit limits.
The most obvious reason to avoid having too much credit available is that you could spend more, further increase debt, and hurt your credit score if you go over your head. Think carefully about whether you can resist the temptations that might come with having a higher credit limit.
Too high a credit limit could affect your ability to get new credit. When a lender reviews your credit report and compares your total available credit with your income, having a credit limit higher than what your income can support is a red flag to the credit analyst. If you ask a bank for a $ 20,000 auto loan, for example, and you have $ 75,000 in credit but have $ 50,000 in income, the lender considers that a risk. If the bank lends you the $ 20,000, you could theoretically be maxing out your credit cards and being unable to meet all of your obligations. In this scenario, it would be advisable to use some of the available credit or lower the credit limit to a more reasonable level.
(For more information, see “6 Benefits of Raising Your Credit Limit.”)