Can Requesting a Credit Increase Hurt Your Score?

Credit scores serve as a numerical representation of an individual’s creditworthiness, playing a significant role in various financial transactions. Lenders, landlords, and even some employers utilize these scores to assess financial responsibility. A higher credit score generally indicates a lower risk, potentially leading to more favorable terms for loans and credit products. Many individuals wonder about the impact of financial decisions, such as requesting a credit limit increase, on their credit score.

Credit Inquiries and Your Score

When a lender or creditor reviews a credit report, it results in a credit inquiry, which can be categorized as either “hard” or “soft.” A hard inquiry occurs when a consumer applies for new credit, such as a loan, a new credit card, or when requesting a credit limit increase. These inquiries signal to other lenders that an individual is seeking additional credit and cause a small, temporary dip in a credit score. While a hard inquiry remains on a credit report for up to two years, its impact on the credit score diminishes after about 12 months. Lenders perform these inquiries to evaluate the risk associated with extending credit, examining an applicant’s borrowing history and repayment behavior.

In contrast, a soft inquiry does not affect a credit score. These occur when a person checks their own credit report, or when lenders pre-approve individuals for offers, conduct background checks for employment, or perform account reviews. Soft inquiries are not visible to other lenders and serve primarily for informational or promotional purposes.

Credit Utilization and Your Score

Credit utilization ratio represents the amount of credit being used relative to the total available credit. It is calculated by dividing the total outstanding balance on revolving credit accounts by the total credit limit on those accounts. This ratio is a significant factor in credit scoring models, the second most important element after payment history. Lenders view a lower utilization ratio more favorably, as it suggests responsible credit management and less reliance on borrowed funds. Financial experts recommend keeping this ratio below 30% to maintain a healthy credit score.

An approved credit limit increase can positively influence a credit score by lowering the credit utilization ratio, provided spending habits remain consistent. For example, if an individual has a $400 balance on a credit card with a $1,000 limit, their utilization is 40%. If the credit limit increases to $2,000 and the balance remains $400, the utilization ratio drops to 20%. This reduction in the ratio indicates improved financial health, which can lead to an increase in the credit score. Therefore, while a hard inquiry might cause a slight, temporary dip, the long-term benefit of a lower utilization ratio can offset this initial impact.

Approaches to Credit Limit Reviews

A credit limit increase can occur through various channels, each with a different implication for credit inquiries. When a consumer directly requests a credit limit increase from their card issuer, it often results in a hard inquiry. Before making such a request, it is advisable for consumers to contact their specific card issuer, through their online account, FAQs, or customer service, to ascertain whether a hard or soft credit pull will be performed. This proactive step can help manage expectations regarding a potential, albeit minor, impact on their credit score.

Credit card issuers also initiate credit limit increases for cardholders who demonstrate responsible credit behavior, such as consistent on-time payments and low utilization. These lender-initiated increases involve a soft inquiry or no inquiry at all, meaning they do not negatively affect the credit score. Similarly, pre-approved offers for credit limit increases extended to consumers with strong credit profiles result in a soft inquiry. The method by which a credit limit increase is obtained is a determining factor in whether a hard inquiry, and thus a potential temporary score reduction, will occur.