How credit limit increases affect your credit score

Many consumers are aware of the many ways in which their credit score can affect them in their everyday lives, but they may not be fully aware of the many ways in which they can affect their credit scores.

There are five factors that go into making up a borrower’s credit score, but the two biggest by far are the amount of late payments he or she has made in the past several months, and the amount of credit he or she is carrying versus the total available credit limits across all accounts. These two considerations alone make up 65 percent of a person’s score, and as such need to be approached wisely. While payment history makes up 35 percent of a person’s rating, and months of hard work can be undone by one missed payment, many borrowers may be more interested in the effects that a lender increasing their credit limits will have on their standings.

What a higher credit limit means

Lenders that see that borrowers have handled their accounts wisely may be inclined to occasionally offer those people increases in their available credit limits, which can have a number of benefits. For instance, this might give them a little more flexibility in how they approach debt, meaning that the larger amount of money they’re allowed to borrow could in turn allow them to deal with any unexpected financial emergencies.

But moreover, in general an increased credit rating will have a positive effect on a borrower’s score right away. This is because the second-biggest portion of a rating is made up of how much debt a borrower is carrying versus how much they are allowed to have at any one time, and makes up 30 percent of that score. For example, suppose a borrower had total combined credit limits of $10,000 spread across four cards, with each having a limit of $2,500. If that borrower owed a combined $4,000 on those accounts, their “credit utilization ratio” was 40 percent, which is slightly higher than what lenders generally want to see. Typically, to max out this portion of a score, a borrower will have to carry 30 percent or less of their limits.

However, if that person has been particularly good about maintaining healthy borrowing habits on one of those accounts — say, by keeping balances low and making all payments on time and in full for a period of several months or more — and receives a $2,000 credit limit increase from one of those lenders, that can be of a significant benefit. This is because that one card has a credit limit of $4,500 now, compared to the other three still keeping the previous $2,500, the total amount they’re allowed to borrow across all accounts is now $12,000. Even though this borrower didn’t do much or anything to reduce balances held from that previous $4,000 level, the credit utilization ratio in his or her name dropped from 40 percent to 33 percent. And because the lower a person’s ratio is, the better his or her score will be, the positive impact is obvious.

What a better score means

Of course, consumers who have improved credit scores will likely find that there are a number of benefits now available to them. For one thing, the access they have to new accounts will increase significantly because many lenders reserve the best possible offers for those with high ratings. But moreover, it makes borrowing on those potential new accounts more affordable, because typically borrowers with higher scores are also trusted with lower rates and fewer fees, since lenders tend to view them as being more trustworthy than those who might have made some credit missteps in the past, such as missing payment deadlines and carrying debt loads that were too large.

But obviously larger credit limits also come with a greater responsibility to not spend to that level, as borrowers may be tempted to try to take on more debt given that they now have the ability to do so. This will not only diminish the credit score that was just instantly improved by the credit limit increase, but also creates a greater risk of not being able to handle the higher balances, which will come with higher minimum payments as a consequence.

Consumers who are concerned about their credit standing in general might want to take the time to order copies of their credit reports with regularity. This will potentially help them to identify any unfair markings that may appear on these documents and could be doing significant harm to what should be good credit scores. If any such entries are discovered, working with a credit repair company may be able to help correct the issue quickly and easily.

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