Will raising my credit limit help my credit rating?
Here are four key considerations when deciding whether or not you should accept a limit increase offer. Photo by Ryan Remiorz / THE CANADIAN PRESS  Article content Q: The seasonal work Ive found is turning out to be more seasonal than I thought it would be. Ive been using my credit cards to get by while I find another job, and Im getting closer to the limits on each of them. Through my online banking, I received offers to increase the limit on two of my credit cards and I figure if theyre offering, whats the harm in accepting. And if I need more money, at least I dont need to apply again. A friend told me that a higher credit limit can even help my credit rating. ~Jocelyn A: When payment cards first became available in Canada in the late 1960s, they were known as charge cards because there was no extension of credit. They were simply a payment method and the full amount was due and payable every month. It wasnt long, however, before financial institutions in Canada became wise to the lucrative credit cards offered south of the border. Now, credit cards are an integral part of the financial affairs of most Canadians, with hundreds of millions of credit cards in circulation worldwide. We apologize, but this video has failed to load. tap here to see other videos from our team. Back to video  Advertisement Story continues below This advertisement has not loaded yet, but your article continues below. Article content Savvy consumers have discovered how to use their credit cards as charge cards. They reap the rewards and avoid the drawbacks. But a great many like to curse their cards and all the hardship they experience because of them. Credit cards themselves, though, arent the problem. They are just small plastic cards with shiny logos that fit into our financial toolboxes. Article content When used correctly, just like with any other tool, the outcome can be spectacular; but when used incorrectly, the consequences can be disastrous. When it comes to carrying credit card debt, your future buying power is drastically reduced. Not only must you repay what you charged on your card, you need to allocate income for interest payments and fees. Suddenly, everything you buy can be as much as 50 per cent more expensive than the original sticker price. Article content When it comes to increasing the limit on your credit cards, only you know how you handle your money and if you can afford a higher limit or not. If a lot of available credit sends you on a spending spree, you may do yourself more harm than good. If youre satisfied knowing its there if you need it and you incorporate additional payments into your budget when you do use it, then a higher limit might be right for you. Before you make your decision, it can help to understand what impact a higher limit may have on your finances and decisions overall. Credit limit increase offers are a marketing tool Financial institutions and credit-card companies routinely verify their clients accounts to see where opportunities for more business may exist. They conduct soft inquires on customer accounts who have consented to credit checks for everything from opening a bank account to applying for a line of credit or mortgage. Part of the consent a customer signs allows for these ongoing checks. Advertisement Story continues below This advertisement has not loaded yet, but your article continues below. Article content A soft inquiry means the creditor only verifies their own products or accounts with the credit bureaus that a client may have, and the inquiry does not affect someones credit score. If youre curious to see which creditors are spot-checking your accounts, request a copy of your own credit report for free. These soft inquiries will be listed for you. By conducting a soft check, the creditor can quickly determine if the credit account is being used properly, if someone is falling behind, or if theres room to offer the client more credit. If youre falling behind a lot, theres every chance the lender will tighten up their terms and conditions. This can mean advising you of a pending interest rate increase or credit limit decrease, changes to other terms or conditions, or in extreme situations, the lender will call the loan. This means that they will make the full amount owing due and payable immediately. When it comes to a credit card, it can no longer be used to make purchases and repayment of the full amount owing is required. 5 Warning Signs that You Might Have Too Much Debt Those who use credit carefully will typically be none the wiser that the lender performed a check. However, those where the soft check returns a high credit score will become the focus for marketing offers. Remember though, just because they offer a limit increase for your credit cards doesnt mean it would be wise for you to accept it. Theres a fine line between what the lender says you can afford, and what you know you can afford. Advertisement Story continues below This advertisement has not loaded yet, but your article continues below. Article content Here are four key considerations when deciding whether or not you should accept a limit increase offer: 1. More available credit means more help in an emergency Credit isnt the same as money, but in a pinch, having credit readily available to you can be crucial. Ironically however, when you really need more credit, thats often the hardest time to get it. For instance, if youre laid off from work and need a line of credit to make ends meet until youre called back, once your income disappears, so does your ability to obtain a new line of credit. To prepare for the unexpected, have credit available to you that you dont routinely use, along with emergency savings to cover your basic expenses for a few months. This is wise financial planning that will help you navigate the bumps in the road. 2. A higher limit can improve your credit score Higher limits on your credit cards will decrease your credit utilization ratio, which is one factor in the calculation of your credit score. Credit utilization simply means how much of your available credit youre using at any point in time. The lower the ratio, the better. For instance, if you have three credit cards with a combined limit of $12,000 and a total amount owing of $9,000, your credit utilization ratio is 75 per cent. However, if you increase the limit on two of the cards so that the combined limit on the three cards is now $18,000, with the same $9,000 still owing, your ratio drops to 50 per cent. Keeping your balance owing on each account below about 65 per cent of the limit helps to protect your credit score. Advertisement Story continues below This advertisement has not loaded yet, but your article continues below. Article content How Credit Scores are Calculated in Canada 3. Your borrowing power decreases with high limits Where a higher limit on your credit cards can help increase your credit score to make other borrowing more attractive, those same higher limits can mean that you qualify for less additional credit. The reason is simple  theres only so much available credit you can afford to pay back. If youre close to that limit with the products you already have, theres less room to lend you more. That limit, when a lender is unable to lend your more, varies. At your bank or credit union the limit is normally 40 per cent of your gross income. If you earn $4,200 before tax each month, that means a maximum of $1,680 can be committed to your payments. This calculation is called your total debt service ratio (TDSR) and it includes your rent, cell phone payment if youre on contract with your service provider, current monthly loan payments, and the minimum requirement payment on your credit cards. 12 Key Things to Know Before Applying for Credit When some lenders calculate this ratio, they base your minimum credit card payment amount not on what you normally owe, but on the limit of your card. The higher the limit, the higher the (potential) minimum payment  and the less additional credit they can lend you. It can mean the difference between buying the car you want and the one that simply moves you from A to B. Lenders use the potential minimum payment amount because you already have that credit available to you. If you were to utilize it after they grant you the additional credit you may run into challenges keeping up with all of your payments. Ultimately, this is for the creditors protection, but it also benefits the borrower. Advertisement Story continues below This advertisement has not loaded yet, but your article continues below. Article content 4. Self-control can be harder when you have more credit available More available credit means youve got more ability to buy things now and pay for them later. And thats the tricky thing with credit. We all know how it works, but for many, the temptation to spend whats available to them is simply too great to resist. When you add in enticements like loyalty points or travel rewards and the ability to fulfill our wishes instantly, its a recipe for debt. You know your habits best. If a lot of available credit makes you feel richer than you really are, its probably best to forego a limit increase and work within what you already have available. The bottom line on whether or not to accept a credit card limit increase offer Many Canadians have a love  hate relationship with their credit cards. They love the convenience, security, benefits, and status of their flexible friend. But a card quickly become a foe when it leads to big bills, high interest charges, and temptation spending thats challenging to reign in. Avoid turning your lifeline into an anchor that drags you down. Debt Consolidation with a Credit Card Balance Transfer Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott byemail, check nomoredebts.orgor call 1-888-527-8999. Share this article in your social network        Latest National Stories Advertisement Story continues below This advertisement has not loaded yet, but your article continues below. The Province Headline News Sign up to receive daily headline news from The Province, a division of Postmedia Network Inc. Email Address There was an error, please provide a valid email address. Sign Up By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300 Thanks for signing up! A welcome email is on its way. If you don't see it, please check your junk folder. The next issue of The Province Headline News will soon be in your inbox. 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