Credit Repair

How Does It Affect Your Credit Score When You Increase Your Credit Limit?

When you increase your credit limit, it can affect your credit score either positively or negatively. Whether the effects are positive or negative depend on an array of factors. In order to get a better idea in this regard, you must have a clear understanding on what a credit utilization rate is and how important a role it plays in determining one’s FICO score. The credit utilization rate is also referred to as debt to credit ratio, which tells you how much debt you are using from the available credit. Following is a brief rundown on the various situations on how this factor can increase or decrease your credit score.

Negative Impact

Increasing your credit limit may affect your credit score negatively if the credit utilization rate or the debt to credit ratio is more than thirty percent. It means if the total outstanding debt is also increasing with the increase in the credit limit, it will hurt your credit worthiness. It is very important for you to keep in mind that just because now you have a higher limit, it does not mean that now you should start spending more and acquiring more debts. Always remember, the higher the outstanding debt balances are, the lower your score will be. For example, suppose the available credit for you is $750 and the outstanding debt balance on that account is $300, the credit utilization ratio is 40% (which is already not good, as it ideally should be less than 30%). Now, the credit limit increases to $1600 and you also acquire additional debt of $800, the total outstanding balance will become $1100 while the available credit is $1600. If you calculate, you will find that the debt to credit ratio now goes up to around 69%, which is obviously worse. It will have a serious negative impact on your credit score.

Positive Impact

On the other hand, if increasing your credit limit actually decreases the outstanding debt balances, it will work in your favor and will positively affect your credit score. In the above example, if your credit limit is increased to $1600 but you acquire an additional debt of only $100, the total outstanding balance will now become $400 ($100 + $300). This way, credit utilization rate is now only 25%, which is a favorable situation. Earlier the debt to credit ratio was 40% and now it is only 25%. It will give a significant boost to your credit score.

30% Of Your Credit Score Is Determined By The Credit Utilization Rate

It is very important for you to keep in mind that 30% of your credit score is determined on the basis of the credit utilization rate. Therefore, you have to be very careful about it. Whenever you get a chance to increase your credit limit, you must try to make the best use of the opportunity. The idea is to increase the credit limit without increasing the debt balances. You should definitely utilize the higher credit limit to make more purchases, but just make sure that the overall outstanding debt balances never go so high that it actually causes an increase in the credit utilization rate. You must always do a thorough calculation in advance on how your purchases are going to affect the debt to credit ratio. The lower this ratio is, the higher your credit score will be.

Overall, as you can see, increasing your credit limit can affect your credit score in either way. If you want to use it in your favor, you will have to be a little careful with how you are going to utilize the higher limit.

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