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What happens when my credit card company raises my credit limit?


Should I accept a credit increase from my credit card company? What about my credit score?

Dear Kim,

I did very well on a debt management plan with Navicore Solutions. I had paid off all of my debt about three years ago through the plan. One year after that, I got my first credit card since completing the debt management plan. It had a low credit limit. Yesterday I received a notice in the mail from the credit card company telling me that they have increased my credit limit substantially due to my good payment history. My question is, will this hurt my credit? I have a decent credit score and want to avoid doing any damage.

Thanks,
Beth

 

Dear Beth,

It is great news that your credit is good enough to receive an offer of a credit limit increase! The impact on your credit score would most likely be positive. The Fair Isaac Company, who generates the FICO credit scoring model, states that credit utilization makes up 30% of your credit score. Credit utilization is the percentage of the amount of your available credit that has been used. For example, if there is a $10,000 credit limit on a credit card and you have a balance of $5,000, your credit utilization ratio is 50%, the lower the credit utilization percentage, the better. Therefore, increasing your credit limit without increasing your debt will lower the credit utilization ratio.

Here is the bad news; statistics have shown that increased credit limits often result in increased debt. Having more available credit may cause temptation to overspend, and in the end cause significant damage and expense. I suggest that you weigh the pros and cons in your particular situation. While the credit limit increase may help raise the score, it can also result in overspending. Please reach out to one of our certified credit counselors at 1-800-992-4557, and discuss your personal situation. We are here to help!

Thanks,
Kim

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Kim Cole is the Education Outreach Coordinator for Navicore Solutions. Kim provides financial education workshops and seminars to communities. Readers can submit general questions relating to personal finance, credit scoring, debt management, student loans, home finance or bankruptcy which may be highlighted in the next month’s edition. All identifying information will be kept anonymous.

Please send your questions via email to DearKim@navicoresolutions.org