Although a boost to your credit limit might be what you need to attain a healthy financial status and make a major transaction, you should exercise caution as applying for an increase affects your credit score. Typically, you have two options to procure an increase in your credit limit. You can open a new account or request an increase in credit on your existing account. Either option affects your FICO score -- the industry-standard credit score pioneered by the Fair Isaac Corporation -- differently.
Credit Score Basics
The FICO scoring model is a three-digit number that represents your credit risk and ranges from 300 to 850. It is based on an algorithmic assessment that predicts future debt-repayment behavior. Your FICO score extracts credit data in your credit report -- with each data weighted for importance -- based on five categories. Your payment history contributes 35 percent to the credit score while amounts owed contribute 30 percent. In addition, 15 percent comes from the length of your credit history while new credit and your types of credit contribute 10 percent each.
Types of Credit Inquiries
Any time a financial institution wants to determine whether or not to increase your credit line, it requests a credit check. This kind of credit pull is a hard inquiry and typically drops your credit score by a few points. Such an inquiry remains on your credit report for at least two years. A soft inquiry has no effect on the score and is generated by entities that want to check your credit for information, such as a landlord or potential employer.
Requesting Credit Line Increase
When you request a credit line increase from your financial institution, the lender will most likely perform a credit check. This initiates a hard credit inquiry and shaves a few points off your credit score -- a small, short-term difference. If approved, the increase appears on your credit report and contributes to a higher open credit line. This lowers your utilization rate, and your score should go up as a result, which will quickly diminish the effect of the hard inquiry. If your request is not granted, the inquiry remains as a negative mark on your report.
Your credit score is significantly affected by your credit utilization, known as the debt-to-credit ratio. Because it contributes 30 percent to your score, requesting and receiving a higher credit limit results in your credit score going up because your utilization goes down. This assumes you maintain the same level of spending and continue to make on-time payments so that other peripheral factors do not adversely affect the score.
Dr Jack Gordon, the Chief Technology Officer at Strontium Logistics, is a 20-year veteran of the engineering and marketing business who favors stiff drinks, good debates and developing innovative digital marketing strategies to help companies grow.