Every now and then, you get a call or letter from the bank: you qualify for a limit increase on your credit card or you're eligible for a $10,000 line of credit. It's packaged up so nicely that it's hard to say no, even if you already have enough credit for your needs. On the other hand, you know if something sounds too good to be true, it probably is, and you don't want to ruin your credit score by accepting. What's the best solution?
"It's hard for people to turn something down. We view an increased credit limit as something we have earned and that we deserve. We view it as success -- almost like a badge of honour," Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada, said in an emailed response to questions. "However, an increase in credit can be a terrible burden if you use it irresponsibly."
Why you get the offer
When your creditor awards you with an offer for a limit increase or a line of credit, it signals you've been a trustworthy, low-risk client. You've used your credit steadily and made payments on time.
But keep in mind, your financial institution has business motives, too.
"The more you use your card, the more money [the bank] will make from transaction fees charged to the places where you purchase goods and services," says Scott Hannah, president of the national Credit Counselling Society. "By increasing your limit, you have the ability to use your card more often and carry a larger balance, which leads to higher interest payments."
Banks can't increase your credit card limit without your consent, Hannah says. They also cannot base the raise on your salary -- that's private information.
you should say no
If you're constantly paying off credit card debt, this may be a sign that you have too much credit to handle, so you don't need to add to it.
And if you're looking for a credit increase to help make ends meet, you should be taking a harder look at your budget. Having to decide which bills to pay at the end of the month or having to make only the minimum payments on bills are signs that an increase will be more harmful than helpful.
Schwartz uses an analogy when working with his clients: Most of us have cars with a speedometer that reaches up to 200 kilometres per hour. But we know it's dangerous and foolish to reach those upper limits of speed.
"You should treat your credit limit the same way," he says. "Reaching that limit can be dangerous and foolish."
Finally, consider security. If you're thinking of increasing the limit on a card you frequently use online, that high limit is also up for grabs for fraudsters. Hang onto a secondary credit card with a lower limit used specifically for online purchases.
Determining if you should say yes
If your credit utilization ratio is teetering around the high end, your budget is nice and roomy, and you're ready to say yes, ask yourself a few final questions.
do you need the higher limit?
Perhaps you have a big-ticket purchase coming up -- say, a family vacation or home renovations -- and you're worried your current card doesn't have a high enough limit, or that charging a large amount without raising your limit will negatively impact your credit utilization ratio.
You may treat your credit cards or line of credit as a security blanket, which is fine as long as you're wise when you draw on that cash.
Finally, if you use your credit card for rewards, increasing the limit to accommodate larger purchases and bigger returns might not be a bad idea.
you afford to pay it off?
No matter why you want to increase your available credit, you must be able to pay it off if you use it. Your budget may be good to go right now, but will it stay that way if you suddenly have a large amount of credit card debt?
As a general rule of thumb, you should be able to pay back the debt you incur on credit within a reasonable amount of time. Hannah says three months is an ideal benchmark for paying off a hefty balance. Carrying a balance for longer than that indicates to creditors that you're relying on credit for ongoing expenses. Schwartz suggests that your total monthly debt payment, excluding your mortgage, should be no more than 10 per cent of your take home pay. Any more could be overwhelming.
you understand the terms of the new limit?
"Find out if there will be any one time or recurring fees associated with the extension of credit," Schwartz said.
If you want a credit increase but haven't received any offers, you can always call the bank yourself. Simply asking for an increase won't affect your credit record, and the bank very likely will say yes -- as long as you are in good standing.
You can also phase in a higher limit. Schwartz suggests asking the bank to increase your limit by $1,000 increments over a couple of years.
"This could help you learn how to live with increased credit with baby steps and not all at once," Schwartz said.
And if you decide the new limit isn't working for you, you can always ask to decrease the limit. The bottom line: if you don't need it, don't take it.