You credit score is made up of a number of components, each with its own weight. Among these components, 30 percent of the credit score is based on the total amount of debt you have compared to your available credit. Therefore, by asking you credit card issuers to raise the limits on your plastic, you can give a boost to your credit score.
If five of the 10 credit cards are maxed out, they would have a total credit card balance of $5,000. Their balance-to-limit ratio would be 50 percent, since they used half of their $10,000 total credit limit. The total amount of credit limits a consumer is currently using is called their “revolving utilization.”
A revolving utilization of 50 percent is considered high by most lenders, as well as by Fair Isaac, creators of the FICO credit score. Additionally, many credit score experts warn that any number above a 35 percent credit utilization lowers your score by anything from a few points to by more than 100.
Using the phone number on the back of their credit cards or on their credit card statement, this fictional consumer dials the card issuers whose plastic they have not maxed out to ask for an extended credit line. If all five credit card issuers double their credit limits, this person now has five credit cards with a $2,000 limit on each and no balance, in addition to the existing five credit cards with a $1,000 limit on each and no available credit.
Therefore, by simply calling several banks, the consumer has cut their balance-to-limit ratio to 33 percent from 50 percent. If they also doubled the credit limit on the five maxed out credit cards, their balance-to-limit ratio would fall to 25 percent. With just a few free telephone calls, they would have boosted their credit score.
However, there are some things to be aware of if you decide to request an extension of the limits on your credit cards.
For one, asking for a higher credit limit triggers a credit inquiry, which can lower your credit score temporarily.
But to counter this problem, you can request all your credit limit increases within a 14-day period. Often, multiple inquiries will be counted as a single inquiry, which can reduce the impact of several inquiries on your credit score. Mortgage and auto inquiries made within a 14-day period count as one inquiry, and the same can hold true when you request a credit limit increase from a bank or credit union.
This technique works since the FICO credit scoring models cannot usually tell why a bank or credit union is inquiring about your credit, meaning it is impossible to tell of the bank is inquiring about your credit to approve you for a mortgage or to hike your credit limit. Since you could be applying for a mortgage or auto loan from a bank or credit union, the credit scoring models err on the side of the consumer.
All inquiries made within 14 days will be grouped together and counted as a single inquiry — which is a big plus for you. And, even if a few credit inquiries hurt your credit score, your lowered utilization percentage should outweigh any damage from the inquiries.
Another thing to avoid is viewing raised credit limits as simply more money for you to spend. If you decide to spend using the newly available credit, your credit score will suffer and you will simply owe the banks more money. Instead, consider a higher credit limit just as you would overdraft protection on a checking account — something you should never use, but as some added protection just in case.
Of course, the banks are not going to approve your request for extended credit if you have a bad payment history. As a result, if you hope to strengthen your credit score using this technique, avoid making late payments or revolving a large balance on your credit card.
To see how your credit history stands, you can request a free credit report at CreditCards.com.
To comment on this story, write Editors@CreditCards.com.
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