Does a Credit Limit Increase Request Hurt Your Score?
Does requesting a credit limit increase hurt your score? Understand its true impact, from initial effects to long-term benefits.
Credit scores are numerical representations of an individual’s creditworthiness, influencing access to various financial products. Credit limits, conversely, represent the maximum amount of credit a lender extends on a credit card or line of credit. Consumers often consider requesting a credit limit increase to manage larger expenses, provide a financial safety net, or enhance their credit profile. Understanding the implications of such a request on a credit score is important for informed financial decision-making.
Understanding Credit Inquiries
A credit inquiry occurs whenever a party accesses an individual’s credit report. There are two primary types: hard inquiries and soft inquiries, each with distinct effects on a credit score. A hard inquiry arises when a lender reviews a credit report as part of a formal application for new credit, such as a credit card or a loan. These inquiries require the individual’s permission and are visible to other lenders.
Hard inquiries can cause a temporary, slight reduction in a credit score. While they remain on a credit report for up to two years, their influence on a credit score diminishes after the first 12 months. Multiple hard inquiries in a short period can signal increased risk to lenders, potentially leading to a more pronounced negative effect on the score.
Conversely, a soft inquiry occurs when a credit report is reviewed without a formal credit application. This type of inquiry can happen when an individual checks their own credit score, when a company pre-approves them for an offer, or for background checks. Soft inquiries do not affect a credit score and are only visible to the individual whose report is being checked.
Lender Evaluation for Credit Limit Increases
When an individual requests a credit limit increase, the type of credit inquiry performed by the lender depends on their specific policies and the nature of the request. Some lenders may conduct a soft inquiry for existing customers. This means that, in many cases, simply asking for a higher limit may not immediately impact the credit score.
However, other lenders may perform a hard inquiry. Before proceeding, it is advisable to inquire with the lender about the type of inquiry they will conduct. Lenders also consider various other factors beyond the credit inquiry when evaluating a credit limit increase request. These include the applicant’s income, their payment history with the lender, their overall debt-to-income ratio, and their existing credit score. A consistent history of on-time payments and responsible credit management improves the likelihood of approval.
Credit Utilization and Your Score
After a credit limit increase is approved, it can positively influence a credit score through its effect on credit utilization. Credit utilization is the percentage of available credit that is currently being used, calculated by dividing outstanding balances by the total credit limit across all revolving accounts. This ratio is a significant factor in credit scoring models, accounting for 30% of a FICO score.
Maintaining a low credit utilization ratio is viewed favorably by lenders, indicating responsible credit management. While experts suggest keeping this ratio below 30%, a lower percentage, such as under 10%, is considered even better for credit scores. An increased credit limit, assuming spending habits do not proportionally increase, immediately lowers this ratio. This reduction in credit utilization can lead to an improvement in the credit score over time. Therefore, while the initial request might involve a temporary, minor impact from a hard inquiry, the long-term benefit of an approved credit limit increase outweighs this brief dip.