How and Why Increasing Your Credit Limits Rebuilds Bad Credit

I hate credit cards with small credit limits.

Not because I'm a hater, but because a small credit limit can wreak havoc on your credit scores.

I know you have at least one of these small limit credit cards lurking in your wallet or purse. After all, it's difficult to resist the offer...especially if you have bad credit and don’t get many offers.

Let's say you're giddy with your Visa card with a $500 limit. Your son's birthday is on Friday, so you have to buy gifts and plan a party for the little dude. Then, as luck would have it, your car breaks down on Saturday and you have to get new brakes. Between the gifts, party and getting the car fixed you've charged $450 to your credit card….and that's just one weekend.

Here's the problem-you're nearly maxing out your credit limit. In this example you've used 90% of the available credit limit. That's not exactly ideal. In a perfect world your utilization (the percentage of your credit limit that you owe) should be 5% or less.

That's right, if you want to get the maximum amount of brownie points on your credit reports, you should keep all your revolving credit balances (such as your credit cards) around 5% or less of your credit limit.

Your revolving balances weigh heavily in the composition of your FICO credit scores. And if your lender reports that you're using 90% of your available credit, (as in the example above) your credit scores will suffer more than a hardcore sports fan spending a night at the opera.

Even if you FedEx a check to the credit card company to pay your balance tomorrow-your payment can take up to 60 days to be reported to the credit reporting agencies and for the new balance to show up on your credit reports. This is called “lag time”.

So even if you don't think you need a higher credit limit...your credit scores do.

This applies to Visa, MasterCard, department store cards, and any other type of revolving credit.

And just to be clear...revolving credit is the type of credit where the amount you owe fluctuates with your balance. On the other hand, installment loans (car loans, mortgage payments, etc.) are types of loans where the monthly payment is always the same over a long period of time.

The Best Strategy to Maximize Your Credit Scores

The best strategy to maximize your credit scores is to pay off your revolving credit cards each month and not use them for 45 to 60 days. Then switch to using your debit card or (if you have one) a business credit card during this time.

This strategy makes a lot of sense when you're 60 days away from making a large purchase using credit...like a new home, refinance, credit limit increase, or new car.

It works like this...

Let's say you're going to fill out a mortgage application sometime in the next two months. What you want to do is get all your credit card balances to $0. The only way to do this is to pay off all your credit cards at least 60 days before you fill out the mortgage application. And then stop using your cards until after you close on the mortgage.

If you pay off all your credit cards only 30 days before you fill out the mortgage application, it may not give the credit reporting agencies enough time to report everything, and your credit reports will continue to show a balance remaining on your cards.

Once your credit reports show less than 5% utilization on your credit card balances, your credit scores should skyrocket. Your higher credit scores should then get you a much lower mortgage rate.

This is called lowering your revolving utilization percentage. There are three ways to lower your revolving utilization:

1) Increase your credit limits on your credit cards
2) Charge less on your credit cards
3) Or both

They are equally important to do.

Increasing your existing credit limits is one of the fastest ways to increase your credit scores. But it's important your spending habits stay the same or are lower. To rush out and quickly use the new available credit would defeat the purpose.

Increase Your Credit Limits - Even if You Don't Think You Need to

Another reason to increase your credit limits is something I call “comparative limits.”

Here's an example of how comparative limits are used:

Let's say the highest credit limit you've managed for years is $1,000. You feel you don't need anything more than that, but your car suddenly breaks down.

Since taking the bus to work isn't an option for you, fixing your car becomes a priority.

The mechanic gives you an estimate of $3,000. So, you begin looking for a loan. The hurdle you'll need to overcome is that you have no experience managing anything higher than a $1,000 limit. So, when you go to a bank for a loan, you'll have a hard time being approved for more than $1,000. Banks try to minimize risk. Not create it. To them you're a high risk.

The best time to increase your credit limits is when you don't need to. That way, when an emergency arises, you'll be able to get the credit you need without going into desperation mode.

So increase your credit limits every chance you get.

You'll be able to plainly see how your new limits are affecting your credit just by comparing your credit scores.

Strategies for Increasing Your Credit Limits

Now that you understand the importance of increasing your credit limits, let me explain how to go about doing it.

If you have a secured credit card...simply add more money to your credit limit. Easy enough...especially if you plan it around tax refund time. Just take your tax refund, deposit it into your account, and make a note on the check to add the amount to increase your credit limit.

You should call your bank and make sure it's routed to the right department so they don't mistake it for a payment. Trust me, you won't miss the money. After all, you lived all year without it.

If you have unsecured credit cards you should increase your credit limits on a regular basis. Just call and request a limit increase. Assuming you've been paying off your cards on time every month, you should be able to raise your limits periodically.

Just recently, I did this myself. I've been spending more money on clothes than I usually do (because of all the weight I've lost), and my credit scores were suffering because-even though we pay off the balance each month-thanks to credit reporting lag time, there was a balance reporting to my credit reports.

I called the credit card company and asked for a limit increase. They promptly raised my credit limit. My scores went back up once the new limit posted to each credit reporting agency.

Just make sure you deserve the increase. You don't want to waste a credit inquiry if you're not sure you'll get approved. To put yourself in the best position to get the higher credit limit, ask yourself a few questions before you call...

• Have you paid your most recent credit card bill?


• Do you have a history of making your payments on time?


• Have all of your checks cleared?


• Have you ever gone over your limit?


• Have you used the account regularly?

Increasing your credit limits can offer a quick boost to your credit scores when you need it. But remember, increasing your limits does not mean you should increase your spending.

Loren McCray is an attorney for the law firm Bradley Ross Law. Loren specializes in disputing the accuracy of your credit reports which can result in improved credit scores.