Does Requesting a Credit Limit Increase Hurt Your Credit Score?
Uncover the complex relationship between asking for a credit limit increase and your credit score, weighing potential initial dips against future gains.
Many individuals considering a credit limit increase on their credit card accounts wonder about the potential impact this action might have on their financial standing. This article clarifies the specific mechanisms through which a credit limit increase request affects a credit score, providing insights into both immediate and long-term considerations.
Credit Inquiries and Your Score
When a consumer requests a credit limit increase, the credit card issuer typically reviews their credit history to assess their creditworthiness. This review often results in a “hard inquiry” on the consumer’s credit report. A hard inquiry occurs when a lender checks an individual’s credit report as part of a lending decision, such as for a new credit card, loan, or a requested credit limit increase. These inquiries generally require the consumer’s permission.
A hard inquiry can lead to a slight, temporary decrease in a credit score. For most people, a single hard inquiry might reduce their FICO Score by fewer than five points. While a hard inquiry remains on a credit report for up to two years, its effect on credit scores typically diminishes within 12 months. Multiple hard inquiries within a brief timeframe, particularly for different types of credit, can signal increased risk to lenders and may have a more pronounced negative effect on a score.
In contrast, “soft inquiries” do not affect a credit score. Soft inquiries occur when a person checks their own credit report, or when lenders perform checks for pre-approved offers or account reviews. These types of inquiries are not linked to an application for new credit and are often not visible to other lenders. Some credit card issuers may perform a soft inquiry for a credit limit increase, especially if they are proactively offering it, which would not impact the score.
Credit Utilization and Your Score
A successful credit limit increase can positively influence a credit score by improving the credit utilization ratio. Credit utilization represents the amount of credit an individual is currently using compared to their total available credit. This ratio is a significant factor in credit scoring models, often accounting for approximately 30% of a FICO score.
To calculate the credit utilization ratio, the total outstanding balances on revolving accounts are divided by the total available credit limit and then multiplied by 100 to get a percentage. For example, if a person has a credit card with a $1,000 limit and a $300 balance, their utilization is 30%. If that limit were to increase to $2,000 while the balance remained $300, the utilization would drop to 15%, assuming no other changes. A lower credit utilization ratio indicates responsible credit management and is generally viewed favorably by lenders.
Financial experts often recommend keeping the overall credit utilization ratio below 30% for optimal credit health, with some suggesting aiming for below 10% for excellent scores. A higher credit limit, assuming spending habits do not increase proportionally, directly lowers this ratio. While the initial request for an increase might involve a temporary score dip due to a hard inquiry, the long-term benefit of a reduced credit utilization ratio can lead to an improvement in the credit score. This positive effect demonstrates that the individual is using a smaller portion of their available credit.