How Your Credit Card Limit Affects Your Credit Score
You probably know that credit cards play a significant role in your credit score. But did you know that your credit card limit, specifically, is a contributing factor? It definitely is. Today on the blog, we’ll tell you why your limit matters and how it all works.
Understand Your Credit Utilization Rate
First, it’s essential to know the term “credit utilization rate.” This is the same as your debt-to-credit ratio. It’s a fancy and short-cut way we refer to the revolving credit you use versus the total credit available to you.
For example, if your credit card has a limit of $2,000 and you charge $1,000 to it, your utilization rate is 50 percent.
How Does This Affect My Credit Score?
The lower your utilization rate, the higher your credit score. The name of the game is to keep what you use low and what you have available high.
We’ll use the same example as before. If your issuer increases your credit limit from $2,000 to $4,000, and we’re still looking at $1,000 in charges, then you decrease your credit utilization rate. Instead of 50 percent, you’re now at a 25 percent utilization rate. Much better for your score.
Lower Utilization, Higher Score
So, an increase on your credit card limit can actually improve your credit score.
That is, as long as you don’t go on a shopping spree with your new limit. Sometimes, you don’t even have to ask for a limit increase. Issuers will automatically raise your limit. Mind you, it’s all in hopes that you’ll spend, incur more interest, and keep them in business.
To use our article’s example, if you charge a total of $3000 with your new, shiny $4000 limit, up goes your utilization rate. It’s now at 75 percent, and your credit score will reflect it. Your score will go down.
Potential creditors could see that you are using nearly all the credit available to you. They understand you’re required to make payments on all that utilization. Further, they understand you to be a high-risk consumer and will not likely offer you yet another line of credit. Though it may not be true, they’re seeing that you’re under financial distress.
Why Do Creditor’s Care About Credit Utilization Rates?
Remember that your credit score is like a report card grade. It tells lenders about your payment history, financial character, and responsibility when it comes to managing credit. It gives them a chance to assess how you handle what you borrow – before they take a risk on extending you a loan or line of credit.
Your credit score is important. And your credit utilization rate is a major part of your score. In fact, 30 percent of your score is determined by this single ratio. If you max out your credit cards, 30 percent of your credit score really suffers. Creditors see that you aren’t responsible with credit and that you already have outstanding debt.
Credit Card Limit Increases Can Serve You
The best thing you can do for your credit score is keep balances low, even when your credit card limit is higher than ever before. If you see a limit increase, refrain from spending big if you’re looking to improve your credit score. The resulting low utilization rate can help you. If you’ll let it.