So you want to improve your credit score, but you aren’t sure how. Short of paying off all your debt overnight (not likely) or creating a lengthy and positive payment history in an instant, there aren’t many magic bullets.
Or are there?
Thanks to something called “credit utilization,” there is one way to quickly improve your credit score: increase your credit limit. Here’s how it works.
Credit limits are much less fixed than they seem
I used to think my credit limits were set in stone. It never occurred to me they could be changed fairly quickly. In fact, I discovered their fluidity a few years ago when suddenly many people were seeing their limits slashed without advance notice.
Why was this happening? It was the height of the recession and banks were getting serious about mitigating risk. That meant not just pulling back on lending, but on existing lines of credit as well, such as a credit card. For the consumer, that could have meant finding out the credit limit was decreased at the point of purchase. Or worse, when they got a notice saying they were suddenly over their limit.
Unfortunately, for some people, the sudden decrease brought their limit to the amount they owe (effectively maxing them out overnight). Luckily, this practice isn’t as rampant now as it was then. But it’s yet another reason to keep an eye on your monthly statements.
The way increasing your credit limit affects your credit score
As much as that situation seems like a nightmare, and it is, you can use the flexibility of credit limits to improve your credit score. And it’s all because of credit utilization.
Credit utilization is the amount of credit you’re using compared to the amount available to you. In other words, it’s whatever percentage your balance is of your total credit limit. For example, if you have a $10,000 credit limit and a $5,000 balance, then your credit utilization is at 50 percent.
It’s all about the credit utilization
Credit utilization makes up a large portion of your credit score because it gives lenders a picture of how stretched your finances are, or are not. In fact, credit utilization (also known as “amounts owed”) accounts for 30 percent of your score. Ideally, you want to keep this at or below 30 percent. (Meaning that balance from above would be too high to have a good credit utilization rate.)
In short, improving your credit utilization can improve your credit score. But, for most of us, it’s not so easy to quickly pay down a large portion of our credit card balance. However, if you’re able to get your credit limit increased, then you’ll get the same result: a lower credit utilization rate.
Increase your credit limit, decrease your credit utilization
Going back to our example above, increasing your credit limit to $15,000 would make your $5,000 balance 30% of the total. And thus, your credit utilization instantly improves as it hits that 30% suggested maximum.
That said, don’t stop working to decrease your debt as you work to improve your credit score. Interest makes debt a costly endeavor. Besides, the sooner you get out of debt, the sooner your credit score and financial outlook will improve.
How you can increase your credit limit
Increasing your credit limit isn’t difficult or time-consuming. All you have to do is call your credit card company and ask to speak to someone about increasing your limit.
From there, your issuer may do a credit check before they decide if you’re approved or not. Don’t let that discourage you.
Even if your credit score isn’t where you’d like it to be, you can improve your chances of an increase by highlighting the length of your history with the credit card issuer. And if you have any extra money to pay down your balance a bit, do that before asking for a credit limit increase. All of these small steps can help you get approved. Just remember to speak courteously and avoid giving sob stories. And, if you get a “no,” ask to speak to a supervisor – sometimes moving up the chain can turn a “no” into a “yes.”
In the end, your score can see an improvement even if they only increase your credit limit a small amount. Anything you can do to improve your credit utilization helps.
And, best of all, increasing your limit won’t cost you a thing – assuming you don’t actually use that shiny new credit limit, that is.
A word of caution before you go
There may be times when the desire to improve your credit score turns into a frenzy that overtakes sound financial practices. Remember that improving your credit score is important, but it’s not everything.
If any part of you has a fear that a higher credit limit will tempt you into debt, then don’t do it. Going into debt for a higher credit score doesn’t make any sense. Debt is expensive, it can be hard to pay off, and it can hurt your credit score. (Remember, the higher your utilization, the worse your score).
No matter what kind of financial advice you’re considering, tailor it to your circumstances and your comfort level. And remember that things that are good for your credit score (such as decreasing debt) are also good for your finances. So you don’t have to separate these two goals in your mind.
Want even more tips to boost your score in the new year? Check out our advice to help you improve your credit in 2017!
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|