Can a credit card limit increase hurt your credit score?
As a nation, we’ve become increasingly fond of credit cards. In fact, Australians have 16.39 million credit cards and over $33 billion in credit card debt accruing interest1. If you own a credit card (and have opted in to receiving offers about credit limit increases), you’ve probably received a letter or call from your bank offering to increase your credit limit. Before going further, it’s worth considering a few things.
CREDIT CARD LIMIT INCREASES CAN AFFECT YOUR CREDIT SCORE
Each time you apply for a credit card, a credit enquiry can be recorded on your credit file by the lender. These credit enquiries stay on your file for five years and can impact your score.
Likewise, if you accept a credit card limit increase, your lender may perform a credit check on you to take a look at your credit history. This means you could receive another credit enquiry on your file. Having multiple credit enquiries on your file over a short time frame has been found to negatively affect your credit score by close to 200 points2.
Additionally, with Comprehensive Credit Reporting (CCR) now in place in Australia, information about your credit limits can now be included on your credit file. A lender may deem you a higher financial risk if they believe your combined credit limits are too high, even if you’re not using all your credit available. If a lender believes you aren’t in a good position to take on any more credit or to meet your repayments, your future applications may be knocked back.
If you’d like to see what enquiries are on your Experian credit file, you can check your credit file for free with Credit Savvy.
THE TEMPTATION TO SPEND MORE
While a higher credit limit can be useful for large purchases, be wary of the risk of spending more than you can afford to pay back. A higher credit limit can really test your discipline when it comes to budgeting and spending. If you realise that after a credit limit increase you can spend $15,000 on your credit card this month, instead of the $5,000 you could spend last month, you might find yourself being a little more comfortable spending $6,000…then perhaps $7,000, and so on. Suddenly, that savings goal for your home deposit looks a lot further away.
Not only that, a higher credit limit may lead to paying more interest if you’re not careful. If you find it harder to pay off your balance in full each month, it can translate into paying more interest to the lender.
Ultimately, you need to weigh the benefits and the risks of raising your credit limit. While a higher credit limit may give you greater buying power, make sure you take into account your savings goals and be realistic about your financial discipline. As we always say, only apply for credit if and when you really need it!
1 Reserve Bank of Australia, C1 Credit and Charge Card Statistics, February 2016
2 Study based on a sample of 50,000 Credit Savvy members as of 17/09/2015. Numbers are based on an extract of Credit Savvy members and are only representative of these members.