A pre-approved increase in your credit limit simply means that you have passed your lender’s initial screening process. This process involves a soft check of your credit history so that the lender has an idea of your borrowing and repayment habits. During the screening, the lender thoroughly reviews all of your current credit balances. The lender preapproves you for an increase in your credit limit if you have been a reliable borrower.
An increase of your credit limit means that you can spend more with your credit card. This allows you to make appropriate adjustments to your budget. But if you have been offered a pre-approved increase, it is important to understand the benefits and pitfalls before spending your lender’s money.
Accepting a Pre-approved Credit Increase
Accepting or rejecting an increase in your credit limit is a personal decision. You’re the one who knows whether you need the extra credit. But consider all the pros and cons before committing yourself. According to the money experts at MoneyWizard.co, whether to accept the increase should be informed by your spending habits, lifestyle, current financial position, and the amount of debt you already carry.
Why Were You Offered the Increase?
You become eligible for an increase in your credit limit because you have a positive payment history and your spending habits are regarded as responsible; for instance, if your spending is low to moderate and you have a high income, or if you pay your bills on time and in full and have no problem repaying any outstanding debt.
By preapproving your credit card for a limit increase, your lender is simply acknowledging that you are a good customer. Timely payment of your credit is evidence that you know how to manage your finances and can cope with a higher credit limit.
Do Pre-approved Offers Affect Your Credit Score?
Before you are pre-approved for a limit increase, your lender must conduct a soft check on your credit score, be satisfied with your borrowing and repayment behavior, and be confident that you will deal with an increase responsibly. The increase in your credit limit will lower your credit utilization ratio and increase your credit score, numbers that are always considered by lenders before extending you credit. If you do not increase your credit expenditures, the enhanced credit helps you keep your credit utilization ratio within the acceptable range of up to 30 percent.
Even so, if you decide to accept the pre-approved offer, check with the lending firm about whether it will be undertaking regular credit checks. When a hard credit check is done on your credit history, it lowers your credit score by a few points. If you have too many hard credit checks within a short period of time, your credit score drops by a significant number of points. This is so because the high number of hard credit checks indicates that you may have applied for loans or credit repeatedly and been repeatedly denied.
Advantages of Accepting the Increase
Depending on your financial health, an increase in your credit limit may be a good idea. If you have been pre-approved because of your financial discipline and no strings are attached, go for it. Accepting the offer does not necessarily mean you should use the increased credit limit, and it will improve your credit score.
The advantages of accepting an increase in your credit limit include:
1. Better Credit Utilization Ratio
Your credit utilization ratio plays a key role in your credit score. The ratio should be within the range of 10 percent to 30 percent of your total available credit. For example, if the total credit you have available from all sources is $10,000, you should avoid having a balance of more than $3,000 at any given time. If you spend more than 30 percent, your credit score will be harmed even if you faithfully pay your monthly balances. When you increase your available credit by accepting a limit increase but don’t increase your spending, you thereby reduce your credit utilization ratio and improve your credit score.
An increase in your credit limit can serve as a cushion in case you run into unexpected financial difficulties, minor or major, that require access to quick emergency cash: a medical bill, car accident costs and repairs, a job loss. Accepting an increase on your credit limit gives you access to more money if and when you really need it.
If your credit limit has been increased and you are unable to repay your credit card bill by the due date, you can convert the entire card bill, or part of it, into equated monthly installments. By doing so, you reduce the interest on the card’s outstanding balance to a certain extent without incurring steep penalties of 30 percent to 40 percent per annum.
As a result of an increase in your credit limit, you may decide to spend more on your daily expenses. If you use less cash and increase the number of your credit-card transactions, you will earn more reward points. If you use your credit card to make expensive purchases, you earn even more reward points. You can spend reward points on travel, merchandise, and events.
Disadvantages of Accepting the Increase
1. Hard Credit Inquiries
If your lender automatically preapproves an increase in your credit limit, your credit score is safe. Since you have passed the initial soft credit check, no hard credit check will be conducted as well. You will simply be notified of the automatic increase. But if you get an email notifying you that you may be eligible for an increase in your credit limit, you must apply for the increase in order to get it.
When you apply for an increase in your credit limit, the lender will ask you to authorize access to a credit report from the credit bureaus they work with. This is a hard check of your credit history. Any hard credit check lowers your credit score by a few points.
If many hard-check inquiries into your credit are conducted around the same time, your credit score can be seriously damaged. So many hard credit inquiries at once may suggest that you have approached several lenders for loans and have been denied. So before you apply for an increase, learn whether a hard credit check will be needed in order to grant the increase.
The temptation is great to accept more credit, especially in order to deal with an emergency. But you must always remember that having access to more credit can lead to overuse of credit and money trouble. Borrowed money must be repaid, always with an interest. If you are struggling to pay off debt when your limit is increased, the increase may encourage you to make the situation even worse. Moreover, a lender who offers you a credit increase can raise the interest rate unexpectedly, which will result in higher monthly payments with higher interest.
At MoneyWizard.co, we recommend that you evaluate your financial position before accepting an increase in your credit limit. Instead, consider building an emergency fund that will come in handy if you face an emergency.
3. Higher Interest Rates and Annual Fees
When your credit limit increases, you may decide to use more credit; if you do, your credit card carries more debt and you must pay a greater amount of monthly interest to your lender. Unless you fully pay your balance every month, you will also pay more interest on the outstanding balance. If you receive an increase in your credit limit and you use any of the extra credit available to you, you are less likely to pay your bill in full. Again, this means that you must pay more interest to your lender.
When you are elevated to a higher credit card—say, Platinum—your limit will be higher and your rewards will better. But interest rate charges will also be higher, up to 6 percent higher. You may also be charged an extra annual fee that you did not have to pay for at the basic level.
Whether you should accept an offer to increase your credit limit depends on your financial needs and the nature of the offer. It can be a good idea or a bad one. If you are pre-approved because your financial behavior is good and there are no strings attached, accepting the offer has benefits. You do not need to use your credit card to spend more, but you will have a bigger safety net.
However, if you need to apply in order to get approved, think twice. The credit reporting agency will conclude that you have requested more credit even though it was your lender who notified you that you may qualify for preapproval. Whether you get an automatic preapproval or you must apply for one, review the offer carefully to make sure that it benefits you.