Millennial Money: Why you should increase credit limits now
Relying on a credit limit in a shaky economy is the equivalent of expecting a weak bridge to weather a storm and carry you to survival.
It’s not uncommon for credit card issuers to minimize their risk by lowering credit limits or closing accounts when there’s potential for economic distress. Credit card issuers took these actions in the Great Recession and early in the COVID-19 pandemic, according to a 2022 report by the Consumer Financial Protection Bureau, perhaps due to changes in credit profiles, internal account performance metrics or shifts in the issuer’s risk management policies.
Even as an uncertain option, a credit limit is still a bridge worth preserving to supplement or back up an emergency fund, especially before a potential recession. There isn’t a foolproof strategy to prevent an issuer from lowering credit limits or closing accounts, but some actions may minimize the impact to your wallet and credit scores.
KEEP CREDIT CARDS OPEN AND ACTIVE
In March and June 2020, many accounts owned by cardholders, even those with high credit scores, were closed due to inactivity, according to a special issue brie f by the CFPB that same year. Inactive cards aren’t making the issuer money in fees, so they pose more risk to the issuer during tough times.
It’s worth keeping credit cards open and regularly charging planned purchases to give issuers one less reason to touch your account, but that might not be enough.
For Timothy Barnes, an auto mechanic based in Rocky Mount, North Carolina, it didn’t matter that he was still employed in late 2020 with active accounts in good standing. A major issuer closed several of his accounts, scrapping over $17,000 in available credit.
“It was one day of buying something online and the credit card was declined,” Barnes says. “They said it was a risk, but I didn’t even miss one single payment.”
Previously, some lenders didn’t provide cardholders with reasons for credit limit reductions. In May 2022, the CFPB’s advisory opinion on the Equal Credit Opportunity Act affirmed that lenders must provide an “adverse action notice” explaining the reason for unfavorable decisions.
CONSIDER REQUESTING A CREDIT LIMIT INCREASE
Consider requesting a higher credit limit on frequently used credit cards if you’re paying on time and not using more than 30% of your available credit. Income is another factor considered by issuers for a credit limit increase, says Derek Mazzarella, a certified financial planner at Glastonbury, Connecticut-based firm Gateway Financial Partners.
“If your income has gone up since you last filed for the credit card or you haven’t updated that in a while, I would make sure your income is actually updated,” Mazzarella says.
Some issuers allow you to update your income by logging in to your account, and they use that information to increase the credit limit, no request necessary. Credit scores could temporarily drop when requesting an increase, depending on the issuer, so ask how credit is impacted before doing so.
One of the biggest factors in credit scores is utilization, or how much credit you have available to you compared with how much you’re using. A credit limit hike can increase the available credit and help build credit scores. The opposite is true if a credit card issuer hacks away at a credit limit later — scores will take a hit. One issuer’s reductions may even have a ripple effect on other credit cards’ limits.
A credit limit increase may lessen the impact of a future reduction, but it won’t safeguard against an account closure, which can also cause scores to drop.
“My credit changed pretty much after they did that, but before that it was exceptional,” Barnes says.
Weigh the potential pros and cons if you’re applying for financing in the near future to determine the best course.
DIVERSIFY CREDIT LIMITS
Barnes had multiple credit card accounts with one issuer because it was convenient. Thankfully, he also had an emergency fund and a few other credit cards that withstood the economic storm of 2020.
Consider building other bridges by opening a credit card at a different institution if you don’t have one already. If you tend to overspend, stick with a lower credit limit to rein in spending, Mazzarella says.
A new card application may cause credit scores to drop temporarily, but likely not as much as a credit limit reduction. For flexible spending, look for a general-purpose credit card that’s accepted by most merchants.
MANAGE CREDIT LIMITS STRATEGICALLY
Use your available credit with caution so it stays manageable. If possible, keep finances under control by:
— Managing current credit cards responsibly before opening another.
— Spacing credit card applications by six months or longer to lessen the impact on credit scores.
— Using less than 30% of available credit.
— Paying more than the minimum on time.
— Having an emergency fund to avoid relying on credit cards.
— Creating a plan to pay off large purchases before adding to a card’s balance.
— Asking credit card issuers to keep your credit limits or accounts open if they intend to take actions on them.
This column was provided to The Associated Press by the personal finance website NerdWallet. Melissa Lambarena is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @lissalambarena.
NerdWallet: How do I get a higher credit limit on my credit card? https://bit.ly/nerdwallet-higher-credit-limit
Consumer Financial Protection Bureau: Credit card line decreases https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf
Consumer Financial Protection Bureau: The early effects of the COVID-19 pandemic on consumer credit https://files.consumerfinance.gov/f/documents/cfpb_early-effects-covid-19-consumer-credit_issue-brief.pdf
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