A credit limit increase on your credit card may improve your credit score, as it may reduce the amount you borrow versus your total available credit.
Dear Credit Guy,
My bank recently called to tell me I am eligible for a higher credit limit. At the time, I was not thinking about what effects this could have on my wish to purchase a home in the near future. So, I agreed to the higher limit.
Now that I have had more time to think, I am not sure if this was a wise decision. Keep in mind that I have excellent credit. I only use my card for small purchases and pay it off right away. Will this credit limit increase impact my ability to buy a home? – Alexia
I have good news for you: Your bank may have actually given your credit score a boost when it increased your credit limit. What this means is that your ability to buy a house also may have increased.
There are a couple of reasons why your credit limit increase may help your credit score.
- Credit utilization: First, the credit limit increase will decrease your credit utilization ratio. Credit utilization is the second most important credit scoring factor (after making on-time payments) and measures the amount of a consumer’s available credit against what their balances are. Your credit utilization ratio was probably low already, since you say you only use the card for small purchases and pay them off immediately. Having access to more credit will make your credit utilization rate drop further.
- A strong signal to lenders: This credit limit increase sends a signal to other lenders that you have been responsible with the credit you have been given. This will be very important as you begin shopping for a home and a mortgage.
Another great thing about credit limit increases is that they are typically not new inquiries, even though the end result is that you do have more credit.
Video: 5 Tips before buying a house
If you were to apply for a different credit card, chances are you would qualify, but that would generate a hard inquiry on your credit reports, which lowers your credit score. Hard inquiries may drop your score by a few points, but the impact is temporary.
How to boost your credit score for purchasing a home
Buying a home and entering into a mortgage is usually the single largest purchase a consumer will make. Being mindful of your credit decisions during this time will be crucial.
- Do not enter into any new credit arrangements without careful consideration.
- I encourage you to continue to use your card responsibly.
- Don’t be tempted to charge more than you were just because your credit limit is higher.
- Continue to use your credit card regularly and pay your bill on time, every time. This is the single best thing you can do for both your credit score and your overall financial health.
Take care of your credit!