Credit Scoring Tip

Category: Finance, Credit.

"One of the quickest ways to increase your credit scores is to increase your credit card limits. " Pretty simple, huh? Let s imagine you have 10 credit cards each with a$ 1, 000 limit.

Now let me explain why something so easy can have such a great impact. So you have a total( or aggregate) credit card limit of$ 10, 00 Now let s assume that five of these credit cards are maxed out. You ve used$ 5, 000 of your$ 10, 000 total credit limit. In this case, you have a total( or aggregate) credit card balance of$ 5, 00Your balance- to- limit ratio is now 50% . This is called your" revolving utilization. " It s the total amount of your credit limits that you are currently using. But now watch what happens. Being 50% utilized is considered high by most lenders standards. and more importantly. by the creators of the FICO credit score.

You pick up the telephone and ask for a credit limit increase on each of the five credit cards you haven t maxed out. So now you have 5 credit cards with a$ 2, 000 limit and a$ 0 balance. Let s suppose each of the five lenders doubles your credit limit. But you also have 5 credit cards with a$ 1, 000 limit with no available credit. And if you doubled the credit limit on the other 5 cards in this example, your balance- to- limit ratio would be 25% . By increasing your credit limits you ve just reduced your balance- to- limit ratio from 50% to 33% .

That s a significant decrease in your ratio! You ve just increased your credit scores by making a few free telephone calls. Bravo! However, there are some potential pitfalls with this strategy. So, to be safe, apply for all credit limit increases within a 14- day period. When you ask for a credit limit increase it will cause a credit inquiry. the type that lowers your credit scores. Here s why.

When calling to increase the credit limit of credit cards issued by banks or credit unions, there s a good chance multiple inquiries will be counted as only one, minimizing the impact several inquiries could have on your credit scores. Credit Scoring Tip. In the past, you ve seen me write about how, when you apply for a mortgage or comparison shop to buy a car, you should always do it within a 14- day period since mortgage and auto inquiries made within this timeframe count as only one inquiry. This is the first time I ve revealed this tip. Well, the same can be true when you ask your bank or credit union to increase your credit limits. The reason this works is because the FICO credit scoring models can t usually distinguish why a bank or credit union is inquiring about your credit. So it errs on the side of the consumer because you COULD be applying for a mortgage or auto loan from a bank or credit union.

In other words, there s no way to tell if the bank is inquiring about your credit in order to approve you for a mortgage or because they want to increase your credit limit. In this case it groups all inquiries within 14 days and counts them as only This is very much in your favor. That brings me to the second pitfall. But even if you do get stung by a few credit inquiries, generally your reduced utilization percentage will outweigh any negative effect of the inquiries- as long as you don t go on a shopping spree afterwards! Increasing Credit Limits is NOT a" Spend More Money" Strategy. So don t make that mistake. If you go out and use up the newly available credit you ll be back in the same situation with your scores( and you will owe even more money) .

Think of your increased limit as overdraft protection on a checking account. Use this Technique to Increase Your Credit Scores Every Six Months. You re not supposed to ever use it. but it s nice to have just in case. From personal experience, I ve found that you can request that your credit limits be increased about once every six months- as long as you put yourself in a position to deserve an increase. If you continually make late payments or have a large balance, odds are they won t increase your limit. In order for the credit card companies to increase your credit limits, you obviously need a good payment history with them.

So keep this in mind when you ask for limit increases. At minimum you should: pay your bills early or on time, pay more than the minimum amount due, and/ or pay off your balance each month.

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