When offered a pre-approved credit card increase, your instinct might go one of two ways. The more frugally-minded will look at it with suspicion: why is my credit card company suddenly making me this offer? Those less thrifty might be inclined to say yes without a second thought. Both views lack nuance. In order to decide if you should take the increased credit limit, there are a few factors you should weigh carefully.
Why Was I Offered A Pre-approved Credit Limit Increase?
Your bank may offer you a pre-approved credit limit increase if you have a history of making payments on time and using your credit responsibly. This is a good business decision for the bank. They know they can trust you to use the credit and eventually pay it back. It also allows and encourages you to spend more. Which, of course, is a good thing for them. It’s a tactic meant to reward customers who they trust while building brand loyalty.
What To Know Before Deciding To Take The Increase
Before you immediately say yes to the additional credit, it’s important to weigh the pros and cons carefully. There are a few main things you should do before you make the final decision:
Check Your Credit Score And Report
It’s important to check your credit report and credit score before you accept a pre-approved increase. How’s your score looking? Is it low? If so, ask yourself why is it low. If it’s low because you’re not keeping up with payments, it’s recommended you pass on the increase. More credit means access to more potential debt.
There’s another credit score consideration to keep in mind. You may be pre-approved for the increase, but that doesn’t mean the lender won’t do a credit inquiry before officially setting you up with the increase. A hard inquiry could mean a hit to your score. Is that hit worth it to you?
Look At Your Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. A lower credit utilization ratio is seen as a positive by lenders as long as you are still actively using your card. It shows the bank that you’re not relying heavily on credit, and are able to pay off any credit you use quickly. If you’re already close to your credit limit, a credit limit increase may not be the best idea. It’s true that increased credit will make your credit utilization ratio look better. Be careful though, if you quickly use the credit, you will be back where you started before the pre-approved credit limit increase.
What Is Your Credit Mix?
When it comes to your overall creditworthiness, it’s important to have a varied mix of types of credit. if you currently only have debt via credit cards (aka revolving credit) it would be better to consider getting a mortgage, car loan or installment loan (aka- installment credit) than increasing your credit card limit. Having different types of credit available to you will have a more positive impact on your credit score.
Your Credit Usage Habits
If you regularly pay off your card in full each month, a credit limit increase might allow you to make a large purchase. It also means access to a little more cash in an emergency.
f you can only make minimum payments, the availability of more credit will saddle you with more debt and more interest to pay on that debt. Not worth the stress and financial impact.
What’s The Interest Rate?
What kind of interest rate does your card offer? If it’s a high rate, having access to extra credit might not be worth it. On the other hand, if the interest rate is low (for a credit card) that makes the offer all that more enticing.
What Are Your Future Credit Needs?
Are you going to be dolling out for a big purchase like a house or car soon? Specifically, a purchase where you’ll need financing. It’s probably not a good idea to go for the increase. Accessing a lot of credit at once doesn’t look go to lenders and credit bureaus.
Also, if a lender does a hard credit inquiry to officially set you up with the increase that could mean a hit to your credit score. A lower score could mean you’ll end up with a higher interest rate for your new financing, or worse denied altogether.
If you manage your debt load well and there won’t be a hard inquiry done to set up the increase, it may be good to take the increase. With a big purchase on the horizon having extra cash available could be helpful.
Can You Get More Reward Points?
If you use your credit card specifically to earn cash back or reward points, it can make sense to increase the limit. This allows you to spend more and earn more on your spending. While not necessarily a solid reason for taking the increase it is something to consider.
Keep in mind, this only benefits you if you are able to pay off the amount you spend on it each month in full.
When To Take The Increase
It might make sense to take the increase if:
- You already have a good credit score
- Your credit utilization ratio is low
- You already have a diverse credit mix
- You’re confident you can pay off your card in full every month before any interest adds up
- You know you have a major purchase coming up and could use a safety net
- You want to rake in the cashback or rewards points on that purchase
When To Hold Off On Taking The Increase
You should say no to the increase if:
- Your credit score is low
- Your credit utilization ratio is high
- You usually carry a balance on your card
- Your interest rate is particularly high
- You’re only making minimum payments
While a pre-approved credit card increase may feel like a pleasant surprise, these are the many factors you should consider before saying yes. If you’re already struggling with debt, accepting a credit limit increase may not be the best plan. You will want to improve your credit score first. The last thing you want to do is rely on extra credit when you should be relying on your debit card instead.
Are you struggling with debt? Our credit counselling services can help. Contact us today!