Ready for a Credit Limit Increase? Know the Risks and Benefits

Recently, my bank offered to extend the limit on my credit card. The increase wasn’t automatic. I had to contact my bank to accept the offer. While it was tempting, I didn’t do it straight away. I took some time to consider whether it was the right move for my finances.

There’s more to a higher credit card limit than greater spending power. Whether you request the limit increase or your card provider offers it, consider the risks and advantages first.

3 reasons to accept a credit card limit increase

A higher credit limit could work in your favour — especially if managed responsibly.

1. It will reduce your credit utilization

Having more credit to your name will impact your credit utilization. Your credit utilization ratio, or debt-to-credit ratio, is a percentage-based measurement that represents how much of your available revolving credit you’re using at any given time. A lower credit utilization ratio may positively impact your credit score.

“With more available credit, if you’re able to keep your utilization under 30%, your credit score should increase in the long run,” Janine Rogan, a Calgary-based Chartered Professional Accountant, author and founder of the financial education platform The Wealth Building Academy, said in an email.

In theory, a higher credit limit will reduce your credit utilization ratio — assuming your credit habits remain unchanged. The lower your debt-to-credit ratio, the more favourable you appear in the eyes of potential lenders.

2. You get a bigger cushion for financial emergencies

A dedicated emergency fund is ideal for significant, unexpected expenses. Most financial experts suggest having three to six months of living expenses tucked away (though any amount helps).

That said, extra room on your credit card may offer additional peace of mind in a financial emergency, even if you don’t end up putting it to use.

3. You unlock more purchasing power

A higher credit limit means greater purchasing power. So long as you use your extra credit responsibly, it could come in handy.

“Accepting an increase means you get more room to spend the same amount you typically would, but it would be at a lower credit utilization,” Parween Mander, a Vancouver-based financial counselor and founder of financial coaching platform The Wealthy Wolfe, said in an email.

And Rogan points out that a higher credit limit offers more room for big-ticket purchases and their accompanying rewards points.

A credit limit increase could be worthwhile if you’ve got some sizable expenses on the horizon — say, a vacation or home repairs. But you need to have a plan to pay down the balance to avoid overextending your finances.

2 reasons to decline a credit card limit increase

Wielded with discretion, a higher credit limit can be an effective financial tool. But if used carelessly, a greater limit may become a financial liability.

1. You put yourself at risk of overspending

More credit means extra spending bandwidth — and the potential for debt.

“Overspending or living beyond your means is a big risk when accepting more of a credit card limit increase,” said Rogan. “It can be dangerous if you find yourself swiping too freely.”

Forty-three percent of Canadians currently have credit card debt, according to NerdWallet’s 2023 Consumer Credit Card Report. And it’s often much easier to slip into debt than it is to break free.

Mander suggests that if you’ve struggled with impulse spending or recurring debt, a larger credit limit may not be a practical choice.

2. It impacts your credit mix

The number and variety of credit accounts you carry factors into your credit score. And when it comes to the ideal credit mix, diversification is key.

If you already have a healthy, diverse spread of credit accounts, a larger credit card limit may be fine. But if your credit card is the only form of credit you carry, consider alternate forms of borrowing before you expand your card limit.

Personal loans and lines of credit may be worth considering, especially if you tend to carry a balance on your credit card. Credit card debt can be expensive, and alternative borrowing options may offer more competitive interest rates.