Your credit score, which ranges from 300 to 850, is an important financial number. It determines whether a credit application will be accepted and, if you are approved and lent money, how much interest you will pay. There are borrowing behaviors that can improve your credit, and some behaviors that can hurt your credit. A change in your credit limit, which is the amount of available credit on an account, is one factor that can impact your credit score.
Increased Credit Limit
Generally, an increased credit limit will not adversely affect your FICO score, the most commonly used credit-worthiness scale. Your FICO score is determined by five factors: Payment history (35%), amount borrowed (30%), age of accounts (15%), types of credit used (10%) and inquiries, which are requests to see your credit report (10%). The higher the score, the better. An increased credit limit generally impacts the component of your score that deals with the amount borrowed, although in some cases it may also result in an inquiry as well.
When creditors look at the amount borrowed, they don't simply look at how much you owe. When creditors determine your FICO score and look at the "amount owed" (which, remember, makes up 30% of your score), they look at two numbers: your debt to income ratio, and your debt to credit ratio. Your debt to credit ratio is impacted by a higher credit limit, and your debt to income ratio might be impacted, if you use the additional credit extended to you.
Debt to Credit Ratio
Your debt to credit ratio looks at the amount of money available for you to borrow, and compares that to the amount of money you actually have borrowed. If a creditor gives you a $100 limit on a charge card, and you borrow $50, you have a 50 percent debt to credit ratio. As a general rule, your credit score will be higher if you keep your credit usage at 30% of your total available credit or less. An increase in your credit limit will lower your debt to credit ratio, provided you do not increase your debt proportionally.
The only exception to this rule is when a credit card becomes "unlimited" or has no limit. When that is the case, you need to check with your creditors for what they report as the "limit," because that will be used to determine your debt to credit ratio.
Debt to Income Ratio
The other factor evaluated when determining how much you owe is the ratio of your debt to your income. The more money you make, the more money you are able to borrow without hurting your credit score. So, if you have an increased credit line and borrow more money as a result, this may adversely affect your debt to income ratio, since you will now be carrying more debt but your income will remain the same.
Inquiries is the other potential component of your credit score that could be affected by an increased credit line. If you request a credit line increase, you should ask the lender whether it will result in your credit report being pulled. If it does, this will show up as an inquiry on your report and generally remains on your credit report for two years. Too many inquiries can lower your credit score.