Credit cards are a type of revolving account that can fluctuate in its spendable amount. Once your balance reaches a certain level, you are unable to make any more purchases on the card until a portion of the debt has been paid off. The amount on a credit line varies considerably depending on employment, income, and credit history. Those who have little credit risk can gain thousands of dollars in purchasing power from a bank. However, whether or not you want to do so depends on if the pros outweigh the cons in your financial situation. Here is a list of both so that you can decide for yourself.
Pro: Increased Spending Power
A larger credit limit allows you to purchase more expensive things and then break down the repayment based on your terms. Keep sending in at least the minimum payment and you will not be fined for doing so. This can be useful if you run into an emergency such as requiring a car repair, dental care, or hospital visit, in which you are unable to pay the whole amount at once.
Con: It Can Lead to Out of Control Spending
The high spending limit can easily become a con if you are unable to control your spending habits and end up using more of your credit line then you can afford to pay back quickly. This results in paying a steep price even when you pay the minimum amount on the card, as you will end up accumulating an extensive amount of interest that can accrue to thousands of dollars.
Pro: Keep a Good Debt to Credit Ratio
A portion of your credit score comes from comparing your total credit limit to the amount used. Lenders typically do not lend credit to those who are at their credit threshold. In most cases, it is recommended to use less than 30 percent of your credit limit, but it is even better to keep it down to 10. By increasing your credit limit, you can spend more money while still maintaining a decent credit to debt ratio and thus increase your credit score. For instance, if you typically spend $2,000 on your credit card that has a limit of $5,000 and increase the limit to $10,000, you will be spending 20 instead of 40 percent of your credit limit.
Con: Temporary Credit Score Reduction
Asking for an increase in credit limit causes a hard inquiry on your credit report. This happens because credit issuers determine if you are credit worthy before increasing your line of credit. To do this, they pull and look at your existing credit score, which will slightly lower your score. If you make too many inquiries at once in a short amount of time, this will lower your credit score even further.
Pro: Prevent Over Limit Fees
The majority of banks charge fees when a customer goes over their credit limit. This does not occur unless you ask the bank to allow you to do so. However, it is much better to avoid the fee altogether by increasing your credit limit. A higher credit limit will allow you to spend money without going over your available credit and acquiring a fee.
Con: More Credit Offers Are Available to You
By increasing your credit limit, your credit score will also increase as you’ll have more available credit and thus your debt to credit ratio is improved. This makes up 30 percent of your credit score, and so has a substantial impact. An increased credit score means that you will be eligible for better credit card offers. Although this may seem like a good thing, in many cases, it can turn sour, as a new line of credit will hurt your credit score until you can establish it. Additionally, it may cause too much dependency on your credit cards and will result in inadequate monitoring of your budget, and thus more debt.