Last year, I asked for credit limit increases on three of my cards and got all of them. This year, I wasn’t so lucky. It’s understandable because credit card companies are very worried their customers won’t pay them back due to economic uncertainty.
In September 2019, I asked three of my credit card issuers for higher spending limits, and I was instantly approved by all three.
The average increase was 75%. American Express doubled my limit, Wells Fargo bumped me up by 76% and Capital One gave me 30% more credit. These issuers gave out more credit like Santa gives out presents.
In November 2020, I tried again, and this time Capital One turned me down flat. American Express demanded my last two tax returns and promised a decision in 15-30 business days. I didn’t even bother asking Chase. Back in May, they cut my credit limit by 50%. I pleaded my case and they rescinded the decrease, but they’re clearly not in a giving mood. In fact, all three issuers appear to be feeling downright grinchy.
It makes sense, given the ongoing COVID-19 pandemic and the related uncertainty about the economy and jobs. Credit card companies are very worried their customers won’t pay them back. My credit limit experiences are typical.
For example, the Federal Reserve’s Q2 2020 Senior Loan Officer Survey reported 60% of financial institutions tightened credit limits and 0% eased them. In Q3 2020, a further 24% tightened and 4% eased. In Q2 2019, on the other hand, only 13% tightened and 9% eased. In Q3 2019, 13% tightened and 4% eased.
Why this matters
Your credit limit is important for two main reasons. One, of course, is your purchasing power. The other is your credit score. How much you owe accounts for 30% of your FICO score, and a key component of that is your credit utilization ratio (how much you owe divided by your credit limit, particularly for revolving accounts such as credit cards). Lower is better.
A higher credit limit means it’s much easier to keep this ratio down, assuming your usage remains constant. Think of it this way: If you owe $3,000 against a $5,000 credit limit, you’re using 60% of your available credit. But $3,000 out of a $10,000 credit limit is a much more favorable 30%.
Keeping it below 30% is a generally recommend threshold, although it’s not a firm cutoff. People with the best credit scores tend to be below 10%. Wherever you fall on the spectrum, your score should improve if you bring your credit utilization ratio down.
Note that utilization is typically reported on your statement date. Even if you pay your credit card bills in full to avoid interest, you might still have a high credit utilization ratio, which could drag down your credit score. One fix is to make an extra mid-month payment to knock the ratio down before the statement even comes out. Another is to request a higher credit limit.
See related: Does carrying a balance help your credit?
More about my situation
I tend to keep my credit utilization relatively low, so I requested higher limits largely as an experiment for this column. Still, I canceled three cards earlier this year, and they had total credit limits of $34,200. Because credit utilization is reported on each individual card and across all of your cards, getting higher limits on my remaining cards would have been nice.
My Capital One rejection stung because that’s my most-used card. I have been a Capital One customer since 2003, I have paid on time every single month, I have a credit score above 800 and my monthly spending on that card has averaged over $4,000 this year. I understand their perspective, though.
With a $25,000 limit, that works out to a typical utilization rate of about 17%. Even my biggest spending month was just over a third of the limit, and I made an extra payment so the statement balance was lower.
See related: How to pay your credit card bill
If you’re thinking about asking for a higher credit limit, first determine whether the lender will perform a soft or hard inquiry. Hard inquiries are more formal credit checks that temporarily trim a few points off your credit score, and they remain on your credit reports for up to two years.
I’m more enthusiastic about asking for a higher credit limit when it’s merely a soft inquiry (as I experienced with Capital One and American Express; Chase generally requires a hard inquiry).
Ask yourself why you want a higher limit, too. Workarounds could include making extra mid-month payments, spreading your purchases across other cards and perhaps even opening a new credit card. Keep in mind that new card applications are also receiving extra scrutiny these days.
Have a question about credit cards? E-mail me at firstname.lastname@example.org and I’d be happy to help.