Once your credit reaches the “fair” to “good” level, your credit card companies and banks might start offering you more and more credit. While this is a positive sign—it means you’re doing something right and they trust you enough to increase the limit—does it always make sense to give yourself more room to potentially acquire high-interest debt? Here’s how to know if it’s an offer you can’t refuse or one you should pass on.
What are the benefits of an increase?
If you always pay off your cards in full before the month is over—and you’re looking to increase your credit score further—increasing your limit will increase your debt to equity ratio in a positive way, which would help lift your score even more. It’s also helpful if you’re going on an expensive vacation or looking to buy a big-ticket item. If you need more room on your credit card to pay for (and then immediately pay off) something, there is no real harm in accepting the increase so you can get the full benefit of points or cash back on that large expense. Also, if your card has overlimit fees, it can make more sense to increase the limit rather than risk being hit with these fees.
What are the potential downfalls?
While increasing your limit can be positive on your debt to equity ratio (and therefore, your score) it also leaves you the ability to get yourself into more debt—more debt means a poor debt to equity ratio and that will negatively impact your score. If you’ve ever had money issues in the past and worry about having that extra room to acquire more debt, it’s probably not worth the risk involved. Also, if you’re not the only cardholder, it means you are trusting someone else not to get you into debt, which is always risky.