Building credit is an important part of your financial life.

Credit is effectively your reputation as a borrower, made up of information about your borrowing and repayment history. Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.

Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower.

Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future.

Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate.

In addition to helping you get a loan, credit can affect other aspects of your life, from renting an apartment to getting hired for a job. Why? Just like lenders, if landlords or employers see a low credit score, they may perceive you to be financially irresponsible and too risky to take on.

You need a history of responsible credit use to establish a solid credit history and credit score.

Credit Card Limit

Credit cards are a form of borrowing, like a short-term loan

It’s important to know what the credit limits are on your credit cards and where you stand, because the percentage of credit you have available can impact your credit score, for better or worse.

When you’re approved for a credit card, you’ll be given a pre-set limit of how much money you can put on the card. Keep in mind that you’ll be charged interest on your purchases if you don’t pay your bill in full each month. If that balance creeps up, the interest can push you above your limit.

Credit Utilization and Your Overall Credit Health

It’s easy, purposely, for you to pull out your credit card to buy items you want or need. If you pay that debt off each month, it won’t negatively affect your credit. However, if you keep a balance on one or more cards, it can start to reduce your credit score due to a high credit utilization.

Credit utilization is the sum of the debt you have on all your revolving credit—essentially, your credit cards and lines of credit—divided by your limit. Many experts recommend to keep credit utilization below 30%, but lower is always better since it’s an influential part of figuring your credit score.

Understanding Credit Facts

• Income has nothing to do with your credit score and isn’t even reported to the credit bureaus, so it’s not listed on your report.
• Bankruptcy does not erase bad credit history. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain there between 7 and 10 years.
• Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
• Paying cash for everything isn’t better than using credit responsibly. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won’t be as good as someone with a long history of responsible credit use.
• You can’t hide debt. Having many credit cards affects your credit, as does the amount of debt you carry. You can opt for a balance transfer to help you save money and pay off your loan faster by moving debt from a high-rate card (or cards) to a low-rate card. Balance Transfer is the balance of money owed on one credit card transferred to another credit card, generally to take advantage of lower interest rates.

Effect on Credit

“Most American’s spending habits are based on the amount of available credit they have, and not on their pay check, cash flow or checking account balance.”

Credit cards are known for their convenience, safety and dependability, but did you know they also offer excellent financial benefits that cash just can’t beat? When used responsibly, credit cardholders can maximize their financial opportunities now while making a positive impact on their financial future.

How you use a credit card affects your credit history and can effect one aspect of your credit report. So it’s really important to create a credit history that reflects responsible and intelligent financial habits.  You can take positive steps to build a positive credit history:

• Use your card regularly
• Make your payments on time
• Keep your balance below your limit
• Continue to use your credit card over an extended period of time
• Regularly read your credit report to make sure it’s error-free

When you practice these tips and responsibly use your credit card, you’ll improve your credit and may even get a higher credit limit. With a higher credit limit and the same responsible practices, you can maintain a low debt-to-credit-limit ratio and further improve your credit standing—which will give you the opportunity to finance large purchases, such as a home, at lower interest rates.

Why Would I Want to Increase My Limit?

There are several reasons you may want to consider asking your creditor for an increase, including:

• When your credit has improved. If you got a credit card at a time when your credit was on the low side or just starting out, chances are your limit is small. If you feel your credit has improved, now may be an appropriate time for an increase.
• When you want your credit to improve. As mentioned before, a high credit utilization can hurt your credit. Increasing your credit limit would reduce the utilization numbers and possibly increase your credit score, provided you don’t increase your balance as well.
• When you need to buy a big-ticket item. Should you need to cover a larger expense that you’d like to budget for and pay off over time, such as a new water heater or vet bills, a credit limit increase can be helpful. If you’ve been diligent in paying your credit card bill, your creditor may approve an increase that can take the stress off your purchase.

Before You Ask

It could cause a temporary drop in your credit score. Although an increase in your credit limit ultimately may help your credit score, it will create a “hard inquiry” on your credit history and could lower your score in the short term. If you continue paying your bills on time and keep your utilization below 30%, it should come back up.

Make sure a higher limit won’t cause too much temptation. Whether you’re asking for a limit to help increase your credit or another similar reason, be careful that you don’t overspend once your credit is increased. Being unable to make payments or keep your utilization level low could cause long-term problems you didn’t intend on facing. Be mindful that those are the two most important factors in credit scores.

Items Taken Into Consideration

When you ask for an increase, the creditor will usually take the following into account before making their decision:

• Account age and standing
• Time since last increase request (avoid asking frequently; space out your requests)
• Annual income
• Employment status
• Payment history

In some instances, the company will ask you how much of an increase you’re asking for. Be realistic in order to increase your chances of approval. Once you’ve asked, you’ll usually get an answer quickly—sometimes even instantly if you apply online or through your bank’s mobile app.

Credit is a financial tool, debt is bad.

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References:

1. https://www.navyfederal.org/makingcents/knowledge-center/credit-cards/articles/6-benefits-of-using-a-credit-card.html
2. https://www.navyfederal.org/makingcents/knowledge-center/credit-cards/how-credit-cards-work/credit-card-basics.html