A high-limit credit card can help you boost your credit score by lowering your credit utilization ratio, diversifying your credit mix and accelerating your debt reduction efforts.
A high-limit credit card can come in handy when you need to cover a large unexpected expense, like replacing a home appliance or paying for an emergency medical bill. And with a higher spending cap, you may have more opportunities to earn more rewards.
But how does a high-limit card affect your credit? Getting a high-limit credit card or increasing your credit limit on your current card can positively affect your credit score. Here are three ways your score can get a boost from a high credit limit.
1. Lowering your credit utilization
A common rule of thumb is to keep your credit utilization ratio below 30 percent, but lower is better. According to Experian, consumers with exceptional FICO credit scores have an average credit utilization ratio of 5.7 percent.
Keep in mind, credit utilization considers each card individually and collectively (if you have more than one revolving credit account). Check out our Credit Utilization Calculator to understand your current ratio.
A high-limit credit card can have a positive impact on your credit score by lowering your credit utilization ratio, assuming you don’t accumulate more debt. For example, if your credit card balance is $1,000, a limit of $2,000 will give you a high utilization ratio of 50 percent. But a limit of $5,000 would make your credit utilization just 20 percent and a $10,000 limit would drop the ratio even further to 10 percent.
FICO has not revealed exactly how many points you can gain or lose based on credit utilization alone, and the overall impact varies based on your overall credit profile. But high-limit cards can help in the right circumstances.
For instance, AJ Saleem, who owns a private tutoring company in Houston, has seen credit score increases of up to 40 points after adding high-limit cards to his collection of business credit cards. He said he has no negative items in his credit history.
“I have seen a high credit score boost, especially when it puts my credit utilization below the 30 percent mark,” Saleem said.
2. Improving your credit mix
Adding a high-limit card may boost your credit score by improving your credit mix. Credit mix refers to the different types of credit accounts you have, including credit cards, mortgages, auto loans and student loans, and accounts for 10 percent of your FICO credit score.
“People with no credit cards tend to be viewed as higher risk than people who have managed credit cards responsibly,” said Tommy Lee, senior director at FICO. “Having credit cards and installment loans with a good credit history will help your FICO scores.”
And, if you already have a high-limit card, you can still benefit indirectly. By keeping your credit utilization low, you stand a greater chance of improving your credit score. Consequently, creditors are more likely to approve you for a car loan, personal loan or mortgage in the future — thereby improving your credit mix.
Creditors like to see that you’re able to manage various types of credit, including installment loans and revolving credit, such as credit cards.
3. Accelerating debt reduction
You might consider getting a balance transfer credit card with a credit limit high enough to transfer other high-interest debts. With good credit, you may be able to qualify for a balance transfer card with a low or 0 percent APR introductory rate for a specified period, with some cards offering zero interest for up to 21 months.
Transferring your high-interest debt to a single high-limit credit card could positively affect your credit score if you take steps to pay off your debt. You could pay down your debt much faster when you’re paying little to no interest, and the promotional period may give you enough time to pay off a significant chunk or all of the balance.
Once you transfer your balances to a balance transfer card, be sure you don’t pile up new debt on your freed-up credit cards. Doing so could offset any credit score gains that may result from your debt reduction efforts.
How to get approved for a high-limit credit card
Most issuers don’t allow a potential cardholder to request a specific credit limit during the application process, so the best way to get a high limit is to have good credit stats, which include:
- Good credit score: Since higher credit limits are generally reserved for those with good credit, be sure you have a good or excellent credit score before you apply. A FICO score of 670 to 739 is considered good, and anything 740 and above is considered excellent.
- Stable income: To credit card companies, it all comes down to risk. They want to know if you’re likely to pay back their money after using the credit they lend you, and a stable income indicates you will. Without it, they may consider you a riskier borrower and extend you less credit.
- Low debt-to-income ratio: DTI is much like credit utilization on a larger scale, factoring in all your debts, such as mortgages, student loans and auto loans. It’s the ratio of your monthly debt payments to your monthly gross income (before taxes), and ideally you’d keep it at less than 30 percent.
- Sufficient credit history: You should consider having at least three to five years of credit history so that lenders know you have a decent amount of experience with credit. However, this doesn’t mean that you can’t qualify if you have a shorter credit history. If you have a good relationship with your issuer (for example, multiple open credit card accounts with positive payment history), you may have a better chance of being approved for a higher limit.
A high-limit credit card has the potential to boost your credit score, but applying for one will likely result in a hard pull on your credit. Hard inquiries can cause a slight, temporary dip in your credit score, but they will fall off your report entirely after two years.
You may be able to get the benefits of a high-limit credit card without applying for a new card. If you already have a credit card, you can request a credit limit increase. Note, however, that your credit card company may run a hard inquiry of your credit report while considering your request as well.
If you’re approved for a high-limit credit card, remember to keep your balances low and pay them in full on time every time to maintain a high credit score.