Your bank has just sent you a pre-approval credit limit offer. Should you accept credit limit increases? When should you think twice about accepting a credit offer from your bank or credit card company?
While receiving a pre-approved credit card limit increase or line of credit offer can be flattering, you should be mindful of how much credit you carry at one time. Having more credit available than you need can lead to debt problems. While there are a few instances in which a credit limit increase makes sense, you need to weigh the benefits and risks before accepting any new credit offer from your bank, credit union or other financing company.
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What Does It Mean To Be Pre-Approved For More Credit?
When you receive a pre-approval offer for more credit, it simply means that you have passed the lender’s initial screening process. This process involves running a soft check into your credit history, looking at your borrowing habits, confirming that you make payments on time and reviewing your current credit balances.
A credit pre-approval is only an invitation and does not guarantee that you will receive the increase as offered. To increase your credit limit, you will need to formally apply. Your bank or lender will then do a hard pull into your credit report to verify whether you are still eligible.
Should You Accept A Pre-Approved Credit Increase?
Whether or not you should accept more credit depends on your current financial situation and debt repayment habits. Be honest with yourself: Are you making full debt payments each month or are you only making partial or minimum payments? If you are not paying off your debts in full each month, then you likely do not need access to more credit.
To further help you make an informed decision, consider the following risks to accepting an increased credit limit or line of credit offer:
- A pre-approval is not a guarantee you will receive the offer. As mentioned, getting a pre-approved offer is only an invitation to apply. If you apply and are not approved, the bank will still have run a hard check into your credit report which will lower your credit score.
- There is a high chance you will use more credit than you can repay. Lenders offer credit limit increases because they know people will eventually take advantage of the extra credit available to them. It takes willpower to avoid running up your credit card balances. I’ve had clients in my office tell me that their debt problems stemmed from when they were given access to more credit and they borrowed more money than they could repay.
- You may not qualify for more loans in the future. More credit now limits your access to credit in the future. It may be wise to forego accepting a line of credit offer today so that when you need a loan, for example to purchase a car, your lender won’t deny your application because you already have too much credit.
- The interest rate on lines of credit can increase unexpectedly. Lines of credit are ‘callable’ debts, meaning the bank can change borrowing terms without warning and at any time. Your lender can raise the interest rate unexpectedly which means, if you have outstanding borrowing on your line of credit, your monthly payment will increase and you will pay more in interest.
- Credit is not a substitute for cash. You may be tempted to accept more credit as a substitute for an emergency fund. However, using credit to pay for emergency expenses can lead to money problems down the road. Borrowed money must be repaid and carries an added interest cost. We never recommend using credit as a safeguard against unexpected costs. Instead, build your own emergency fund for events like job loss, illness, or divorce.
Should You Accept More Credit To Improve Your Credit Score?
One of the most popular reasons for accepting a credit limit increase is to improve your credit score.
Generally, the more credit you have available the higher your credit score, if you maintain a healthy credit utilization rate. Your credit utilization ratio is a calculation of the total debt you’ve borrowed divided by the total amount of credit you have available. For example, if you have $10,000 in credit available and are borrowing $8,000 you have an 80% utilization rate. This is too high so you may be tempted to increase your credit limit to $15,000 which would lower your utilization to 53%.
Take on only the amount of credit you can comfortably repay. You are not obligated to use the credit available to you, and you can cancel or lower your limits in the future, however people rarely do this. Debt creep, the slow build-up of your actual balances, is a real risk. A better way to manage your credit utilization is to pay your balances in full each month. If you currently carry a balance, build a debt repayment plan to reduce your existing balances.
The diversity of your loans is another factor that affects your credit score. Taking on more credit card debt or revolving debt, can reduce your score. However taking on loan for those with bad credit, can harm your credit score.
My advice: if you already have a good credit score (say in the 700 to 750 range) , you don’t need to chase a better credit score. If you are applying for more credit just to improve your utilization rate there is a better way to improve your credit score.
When Higher Credit Limits Make Sense
There are situations when the benefits of accepting a credit increase offer outweigh the risks. You may consider increasing your credit limit if:
- You are someone who repays their monthly debt obligations in full;
- You bump up against your credit limits periodically and want to avoid over-the-limit fees;
- You want to use your credit card to earn more rewards points;
- You’re using it to finance renovations or something that will add to your net worth and have a plan to pay off that debt;
- You have cash on hand invested elsewhere you can access if you need to pay off the balance quickly;
- You are using it as an alternative to withdrawing money from investments like your retirement funds.
When To Say No
There are financial circumstances when you should turn down any pre-approved credit offer:
- You’re using credit for everyday living expenses;
- Your budget isn’t balanced and you can’t pay down existing loans;
- You lack willpower not to spend money;
- When a personal loan is a better choice. Term loans offer a fixed repayment period reducing the risk of carrying balances forever.
Before accepting a pre-approval for a credit limit increase, which is potentially an increase in debt, you need to think critically about your personal financial situation. You should only take on as much credit as you can comfortably repay in full. If you are using new debt to keep up with old debt, consider contacting a Licensed Insolvency Trustee for a better plan to deal with your balances.
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