If you’re making a conscious effort to be responsible with money and not overspend, it may seem logical to keep your credit limits fairly low. This may reduce the temptation to use credit for discretionary expenses and when willpower fails, it puts a hard stop on spending. Unfortunately, this isn’t the ideal approach to using credit responsibility or building a good credit score— an important part of your overall financial success and security.
Building good credit isn’t just about paying your bills on time and avoiding excessive debt. Sometimes, you have to use credit to demonstrate your ability to manage it appropriately. There are many ways to strengthen your credit score, and some of them are more obvious than others. Here are some reasons you may actually want to increase your credit limit. When used correctly, it can be a great strategy for getting ahead and positioning yourself for a strong financial future.
You have to use credit to build good credit
First, a quick note on how credit scores are determined. It’s actually a combination of several different behavioural factors, starting with your bill payment history and your use of credit cards. It helps to pay your bills on time and in full whenever possible. Ideally, you want to pay off your entire credit card bill each and every month. Failing that, you’ll want to make the minimum payment or higher (the more you pay off, the better it is for your credit score and your overall financial health).
Other factors that impact your credit score include the types of credit you hold (it helps to hold several different types, such as regular bills, a credit card and/or a personal loan). They will also consider how many credit applications you’ve made in recent history and how long various credit accounts have been open. In short, you want to demonstrate the best habits you can for as long as possible. Here are some tips on building a great credit score.
Having untouched credit demonstrates financial responsibility
When you have access to credit and don’t use all (or any) of it, it demonstrates an ability to manage your money well and avoid incurring excess debt. Without significant access to credit, it’s impossible to demonstrate this skill. Think of it this way— if you have $20,000.00 in credit available to you but only owe $3,000.00 on your credit card, it looks a lot better than owing the same $3,000.00 on a card with a $5,000.00 limit. It’s all about your balance in relation to your limit. You always want to owe significantly less than you theoretically could, given your credit limits.
One way to achieve this is to ask your lender to increase your credit card limit and then pretend it never happened. Essentially, continue to behave as if your lower limit is still in place. You may have access to $20,000 in reality, but mentally, cut yourself off at a much lower number. The important thing is to maintain a balance that is well below your limit at all times to demonstrate discipline and fiscal responsibility. This applies to credit cards, personal loans and Home Lines of Credit (HELOCs) as well as other forms of lending.
How to increase your credit
If you have existing credit cards, lines of credit or personal loans, simply call your lender and ask to discuss a credit increase on each account. In most cases, it’s fairly straightforward and can be handled over the phone. You may have to provide proof of income or other information before the increase is approved.
If you don’t have access to credit or only use one form of credit, such as a credit card, consider opening one or several other forms of credit. This could be a second credit card, a personal loan or even overdraft on your bank account. Your mortgage may also impact your credit score.
Bonus: when you have access to more credit, it’s there if you need it
The strategy behind having more credit than you need is to not use it, but sometimes, life throws you an unexpected curveball (a lesson we’ve all learned in 2020). If a financial emergency were to occur, access to credit can provide excellent peace of mind for your family. This includes sudden income loss, an expensive car repair, an unexpected household expense or other unforeseen financial event. It’s better to have access to money when you need it than to be scrambling to apply for credit in an already stressful time. When you set up that higher limit, you’ll be prepared for whatever life throws your way.
We are here to help
If you’re struggling financially, please consider downloading our free guide to Rebuilding After a Financial Emergency. We’re also here to support you with financial guidance and access to personal loans when you need them. If you’d like personalized information and advice, please reach out to your local easyfinancial branch or easyhome branch, or give us a call at 1-888-502-3279. We understand the challenges you’re experiencing and we are here to help.