Having excellent credit is essential for the budget-conscious layperson. Whether you’re buying a new car, applying for a home loan, or starting a new business, a fantastic credit score could mean the difference between landing your dream car/house/job and trudging home in defeat, empty-handed.
There are obvious ways to keep your credit high – paying bills on time, not maxing out credit cards, and so on. But there’s another lesser-known but simple way to boost your credit score, and it only takes a couple of minutes!
Lines of credit
Your credit cards all have credit limits – the maximum amount they will allow you to charge on a card. We all know that maxing them out is a bad idea. But did you know that using just 30% of your total line of credit could also reduce your credit score?
The credit bureau assesses the sum of all your credit cards’ limits, then adds up your total balance carried any given moment. For example, say you have two open credit cards: Card A has a $2,500 limit and Card B has a $5,000 limit. This means you have a $7,500 total line of credit.
Now let’s say you have a balance of $1,000 on Card A and $2,000 on Card B. That means you’re carrying a total balance of $3,000. You might think, “I’m way under my credit limit, so I’m good!” Wrong!
3,000 / 7,500 = 40%
You are using more than 30% of your available credit. The bureaus will ding you for this without ever telling you, even if you pay the balance off on time, in full, every month. Jerks!
Increase your credit card limits
Fortunately there is an easy way to address this. First, you could just open another credit card. If you only have one or two credit cards, it’s probably a good idea to open at least one more.
An even easier solution, however, is to increase your credit card limits with the credit card companies. How? Just ask! Call the number on the back of your card and ask them for a limit increase. If you’ve been a good customer (longtime user, bills paid on time), there’s no reason they should say no.
Some companies will automatically increase your credit card limits after a certain amount of time as a courtesy, but don’t count on it. This is especially true for entry-level, “starter” cards with low limits designed to help young adults build credit. For example, I had a Chase Freedom Visa for years and never realized my limit was only $3,000 and that it had never increased during all that time! Three thousand dollars?? What am I, an undergrad??
Thankfully, I have a couple of other cards with $10,000+ limits, so I never need to worry about crossing the 30% threshold.
Anyway, I gave them a call and in thirty seconds my new limit was $8,000. Just like that!
Going back to the original example – now let’s assume you’ve called your credit card companies and gotten your limits increased to $5,000 and $7,500 for Cards A and B, respectively. Your total available line of credit is now $12,500!
3,000 / 12,500 = 24%
Hooray. All good!
Why this is important
As I mentioned earlier, good credit is crucial for everything from obtaining a home loan to buying a car at a decent interest rate. I’ve seen clients have no choice but to pay upwards of 20% interest on a used car loan because the banks wouldn’t take them otherwise. It’s like setting money on fire.
Even if you primarily use cash and don’t use credit often, you should still increase your credit card limits regularly. Your car’s transmission may suddenly give out, and to rebuild it you’ll have to charge three grand on a credit card. Perhaps you want to buy that pricey new watch or camera you’ve been eyeing. Or maybe your old bed is falling apart and you need a new mattress. Without those limit increases, you’ll max out your 30% in a hurry and end up hurting your credit score. Don’t risk it!
Calling to increase your credit card limits takes only a few minutes of your time, yet the result is a big win – an improved credit score that will positively impact major financial decisions down the line.
Have any questions or suggestions about improving your credit? Leave a comment below!