Credit limit increases are often touted as one way to help boost your credit score. Because a major part of your score is determined by how much of your credit limit you are using at any one time, the thinking is that by having a higher limit, your credit utilization rate will be lower.
If you have an initial limit of $2,000 and put $1,000 on your card, your utilization rate is 50%. If your limit is bumped up to $4,000, though, and you still spend $1,000, your utilization rate drops to 25%.
In turn, your credit score could grow over time, giving you more favorable interest rates on and access to better financial products, like rewards credit cards, mortgages and even home or apartment rentals. Most experts recommend keeping your rate at 30% or lower to maximize your score.
The problem is, a higher credit limit isn't always a good thing. When a person's credit limit increases, the amount of credit they use and the amount of credit card debt they carry typically increases in tandem. That means you're potentially digging yourself deeper into debt and paying more in interest to the credit card company each month.
That's according to research by Scott Fulford and Scott Schuh from the Federal Reserve Bank of Boston, which found "credit card debt changes nearly proportionately to credit and at about the same time, so the fraction of credit used is relatively stable over time." In other words, if you have a $5,000 limit and $2,000 in debt, you're likely to spend more and increase your debt to $4,000 if your limit is doubled to $10,000.
That research was sited by Elena Botella, a former Capital One employee who recently wrote about the company's suspect credit card practices for The New Republic.
While a credit limit increase can seem dangerous for someone already saddled with credit card debt, a higher limit can be necessary for some people to make ends meet, Ted Rossman, an industry analyst at Creditcards.com, tells CNBC Make It. While it's ideal not to carry any credit card debt at all, "of course that isn't happening" for many people, he says. America is a consumer debt society.
"In the abstract, a higher credit limit should help your credit score because it will lower your credit utilization ratio as long as how much you owe remains constant or goes down," says Rossman. But, "if there's any chance you'll view a higher credit limit as an excuse to get deeper into debt, you should avoid it."
Matt Schulz, chief industry analyst at CompareCards.com, agrees that the situation is complicated.
"If you have credit card debt, getting a credit line increase can be like making the hole in the bottom of a sinking boat bigger instead of working to plug it," Schulz tells CNBC Make It. "If you feel your debt is out of control and that a higher limit would just lead you to spend more, you should absolutely, positively not get one."
That said, handling a credit limit increase "wisely" can help in tough situations.
"If you're close to maxing out your credit cards, a credit line increase can give you a little financial breathing room in case an emergency strikes," Schulz says.
And if you use it to help boost your score — by keeping your utilization low, as detailed above — that could help you qualify "for things that can help you get that debt further under control," like a 0% balance transfer card.
"Ultimately, you need to know yourself and what risk you're willing to take," he says. "Pro tip: If you have debt and someone tries to sell you on the benefits of a higher credit limit without also laying out the risks involved, take your business elsewhere. That person doesn't have your best interests in mind."
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