#FinancialFridays: Pros and Cons of Increasing your Credit Limit
Should you or shouldn’t you? We have made a list that may help you make this decision.
Gain more purchasing power
A higher credit limit can help you if you need to make a big purchase and wouldn’t be able to put it all on your card with your current credit limit. It’s also helpful for people who are still building their credit or those who are rebuilding their credit.
Improve your credit score
Increasing your credit card limit can help improve your credit score. One of the metrics that go into calculating your credit score is your credit utilization ratio, which is calculated by dividing the total amount of credit you’re using by the total credit available to you.
An emergency safety net
Financial planners often tell people to have at least three to six months of savings to cover their expenses in case of an emergency or if they lose their jobs. But some emergencies can’t be paid for in cash and having room on your credit card to pay for them could be a lifesaver in a pinch.
A higher limit means more total debt
If you’re experiencing financial difficulty and have used the rest of your available credit, you’re likely better off refinancing your credit card debt via a lower-interest personal loan or line of credit. A rule to remember: if you aren’t sure if you’ll be able to use that extra credit responsibly, you’re likely better off skipping an increased credit limit on your credit card account.
A hard credit check will impact your credit score
External like applying for a credit card increase can decrease your credit score over the short term. That’s because one factor in calculating your credit score is how much credit you apply for, which is tracked via every hard credit check inquiry a lender makes. It could make a huge difference if you’re about to apply for a personal loan or a mortgage.
It will impact your credit mix
Some people rely too heavily on credit cards rather than applying for other types of credit to diversify their credit mix. This is important since credit cards typically have higher interest rates than personal loans, auto loans, or lines of credit.
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