The question about when to ask for a credit increase has come up quite often. Today, I will focus on the factors that prevent people from wanting to increase their credit scores. Generally, I mostly hear the following factors:
1) If you increase the limit, it exposes the amount of risk. For example, if the credit card was stolen today, and we had a $1,000 limit versus $10,000, we would be more scared that someone can use up to $10,000 on the credit card.
2) Negative impact on your credit score.
3) If we increase our credit scores and we have poor financial discipline, then we may be exposed to too much debt that we cannot repay, so it is easier to self-discipline by keeping our credit limit lower.
For the first concern, credit card companies generally have fraud protection in place. Once you see a fraudulent transaction, you have 30 days to report it. What you would normally do is shut down the credit card right away. Identify the fraudulent transaction. The credit card company will launch and investigation and reimburse you for those charges. So to minimize the fear of risk, you just need to monitor your transactions a few times a month to ensure that all the charges to your credit card are ones that you have done yourself. Therefore, regardless of how much credit limit you have, the procedure remains the same. The credit card company will reimburse you the same way for a $20 transaction and for a $6,000 transaction.
Secondly, in terms of impact to your credit score. Keep in mind that “amounts owed” account for 30% of your credit score. For example, if you have $10,000 in total available credit (i.e. by adding up all your credit scores together), you want to stay between 0.1% – 10% usage to be ideal and increase your credit score. Therefore, you want to stay under $1,000 in total closing balances. Between 10%-30% is still good for your credit score. The % of usage tells lenders the amount of risk you are to them. Once you reach the 75% mark, it will start hurting your credit score. So increasing credit limits actually helps your credit score because you increase the amount of available credit, so that your % of usage goes down.
For the third and final factor, this is dependent from person to person. You need to stay financially discipline to overcome this factor. Some people view credit cards as a means of helping you pay for something ahead of time, and you will get the money later to pay off the bill. I personally view my credit card as a way of earning points. I would never use my credit card unless I already know that I have the money available to pay off the bill in full. I only use the credit card so that I can earn rewards. If credit cards did not offer me rewards, I might not actually be using credit cards that often. I might only use it for large transactions because I am not a fan of carrying a lot of cash on me all the time.