Do you remember the day you got your first credit card? Chances are good that it came with a low limit. And while that was maybe helpful for small purchases — a bill here, a lunch there — over time you likely reached a point where you wondered how to increase that credit card limit.
A credit limit increase can open you up to new opportunities and expand your buying power as a consumer, but it also comes with a few risks.
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More spending power
Say, for example, you use your credit card to pay for most of your household expenses so that you can reap rewards. Maybe your needs have outstripped what your credit card limit allows, even though you’re well within your budget to up that limit. In that case, applying for and receiving a higher credit limit could make for some extra breathing room and flexibility each month as your household expenses fluctuate.
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Allows for a large purchase to be made
The second benefit is that it allows for larger one-time purchases to be made. You may find yourself faced with an unexpected or emergency-related expense that you can’t cover right away. A higher credit limit makes it less likely that you’ll get stuck at the counter unable to pay for your item.
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Can improve your credit utilization ratio
Lastly, and most importantly, a higher credit limit can help you build a better credit score by improving your credit utilization ratio (the amount of credit you’ve used compared with your available credit). It’s generally accepted that a credit utilization ratio below 30% is good for your credit. So, for example, if your limit is $10,000, your ideal credit card balance at any given time would be $3,000 or less. By raising your available credit, you lower your credit utilization rate, which can give your overall score a boost.