Credit Card Limits: The Good and the Bad

It can be a surprise when you get an offer from your bank or credit card company to increase your credit card limit. Should you jump on the chance for a credit card limit increase, or should you be skeptical of the bank trying to get you to borrow more?

There’s not necessarily a universal answer. It depends on your personal preferences, your present and future financial plans, and your spending behaviour.

Credit has never been so widely available, and Canadians have been borrowing accordingly. As a whole, Canadians owed roughly $74 billion in credit card debt at the start of 2021, a significant drop from 2019. With more Canadians clearing their debts, they’re more likely to get offers to increase their credit card limits. The question is, should you accept?

The debt professionals at David Sklar & Associates help people with their credit card debt every day. It’s among the most common types of debt that people struggle with. Book a free consultation with a Licensed Insolvency Trustee if you’re ready to get out of credit card debt in Ontario but you’re not sure how to start.

Why Do You Get Credit Card Limit Increase Offers?

Banks, credit unions, and credit card companies are always looking for new business, and their business is extending loans and credit. They routinely perform soft inquiries on their clients to verify how their accounts are being used. They’re looking to see if clients routinely get behind on their payments or if they always pay their balance in full.

A soft inquiry does not affect your credit score, whereas a hard inquiry will show up. A hard inquiry is where you apply for a new loan or line of credit, and the borrower checks with the credit bureau.

If you are often behind on your payments, the results of these soft checks may prompt the creditor to raise your interest rate or change the terms and conditions of your credit card. But if you have a proven track record of paying your debts on time, they may extend an offer to increase your credit limit. They’re always looking for new opportunities to expand their business with low-risk borrowers.

Reasons to Accept a Credit Card Limit Increase

It’s true that the bank and credit card companies only extend these offers to increase their business, but it doesn’t mean you should turn down the offer. There are many ways a higher credit limit can benefit you.

#1 Get Through an Emergency

Having available credit can be a blessing when you’re facing an emergency. Whether it’s emergency car repairs, a surprise bill, or unexpected job loss, available credit can help you get through a tough time. The important thing to remember is that once you need credit, it may be too late to apply. If you’ve lost your income, lenders will be wary of extending more credit to you. Accept a credit card limit increase now and you can rely on it just in case.

At the end of the day, a credit card is not a great emergency plan. Even better than a credit card limit increase is a line of credit, which tends to offer lower interest rates. That said, the best emergency plan is saving up your own dedicated emergency fund that will prevent you from going into debt in a crisis.

#2 Improve Your Credit Score

Because of how your credit score is calculated, raising your credit card limit can help improve your credit score. A significant part of your score is affected by your credit utilization rate. This is the percent of available credit that you are currently using.

For example, if you owed $1,000 with a credit limit of $5,000, you would have a 20% utilization rate. Even if you don’t borrow any more money, reducing your credit limit to $2,000 would make it look like you were more debt-burdened. Unused, available credit will make your credit utilization rate look better and improve your credit score.

High credit card limits will help your credit score if you don’t use them. But it can hurt your score if you start carrying a balance over on that higher balance.

Why You Should Turn Down a Credit Card Limit Increase

A higher credit card limit isn’t always a good thing. There are plenty of compelling reasons to turn down the offer of a credit card limit increase.

#1 It’s Too Tempting to Spend

If you’re worried that having more credit available will lead to impulse buying and a cavalier attitude about your budget, it makes a lot of sense to decline the offer.

Impulse buying can lead to higher bills than you intended. There are strategies for curtailing impulse buying, such as:

  • Deleting shopping apps and from your phone and deleting saved credit card information on websites and accounts;
  • Finding support from someone else in your life who is working on their financial health, with whom you can check in from time to time;
  • Delaying your purchases for 24 hours so that you can stop and reconsider them.

That said, if you’re concerned that having the credit available means you will use it, there is nothing wrong with turning down a credit card limit increase.

#2 You’re Trying to Fix a Debt Problem

When you’re buried in debt and struggling to pay bills, it can be tempting to reach for any solution. But you can’t borrow your way out of debt. A credit card limit increase can feel like a relief. Now you have just a little more to rely on when you’re short at the end of the month.

The problem is, you always have to pay it back. When you carry a balance over from one month to another, you’re reducing your future earning power by making past purchases cost so much more. As your credit card balance increases, so too do your monthly payments, making it harder and harder to get out.

Instead of increasing your credit card limit, talk to us about debt counselling in Toronto. If you feel like it’s impossible to pay off your debts already, you have options, including credit counselling, consumer proposals, bankruptcy, and other alternatives to debt consolidation.

#3 High Limits Can Prevent You from Getting Other Types of Credit

Another reason you might want to decline a credit card limit increase is that you’re interested in obtaining another type of credit.

Lenders realize that you only have so much income to go around and so much money to make payments with. They may look at the total credit available to you and reject your application if you already have too much available. This means you want to optimize the type of credit you have, ideally obtaining as much low-interest credit as possible.

If your bank or credit union has extended you an offer to increase your credit card limit, you may want to look into a line of credit instead. Lines of credit work differently from credit cards. Rather than making purchases with them, you borrow against them and use the cash however you need to. People often use them to make renovations on their homes or in case of an emergency.

Interest rates on lines of credit are typically lower than credit cards, and you only have to pay the interest each month if you choose not to pay back any principal.

How to Increase Your Credit Card Limit?

If you haven’t received an offer to increase your credit card limit, you can still find out how to increase your credit card limit. The easiest way to do it is to apply with your current lender. They will likely make a hard inquiry into your credit score before approving your application. This will have a temporary impact on your credit score, so it’s a good idea to avoid applying too many times or applying for another credit card if your initial application is denied.

Should You Cancel Your Credit Cards After Paying Them Off?

It’s not unusual for people who have gone through insolvency to swear they’ll cut up their credit cards and stay out of debt for good. If you’re worried that the temptation is too great and that you’ll use them if you have them, it makes sense to cancel them. However, it’s not a decision to make lightly.

If you have a credit card with zero balance on it when you file bankruptcy or a consumer proposal, you’ll likely be able to keep it, if the credit card company agrees in writing to allow you to keep it. Your other cards will be cancelled, and it can be difficult to qualify for a new card until you’ve restored your credit score.

Keeping credit cards that are still open means you’ll still have credit available, and it can help you protect your credit rating and start to rebuild.

The alternative to keeping your card is getting a secured credit card. With these, you make a deposit to secure the credit. Secured credit card limits tend to equal the deposit you make so that if you don’t make your payments on time, the lender can simply take your deposit and close the account.

Increasing your credit card limit may have pros and cons. But if you’re hoping that a higher credit card limit will help with your debt, you need another plan. Call David Sklar & Associates to help with credit card debt in Ontario. In a first free consultation with you, we’ll take a look at your financial situation without judgment, and find a way for you to get out of debt.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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