Should You Increase Your Credit Limit for Holiday Expenses?
How are you planning to pay for your holiday shopping and other expenses? For a lot of people, the answer is a credit card – or several credit cards. We’re accustomed to paying with plastic, so much so that we barely give it a second thought.
At Addition Financial, we hear from our members at this time of year with questions about holiday expenses. One of the things we’re asked most frequently is this:
“Should I increase my credit limit to pay for holiday expenses?”
That’s a good question. If you’re going to increase credit limits on your cards, you should think about it first. It’s a decision that could have a big impact on you both now and in the future. Here’s what you need to know.
The Benefits of Increasing Your Credit Limit
Let’s start with the good news. There are some potential benefits associated with increasing your credit limit at the holidays – and if these apply to you, then it might be worth asking your credit card company or bank for an increase.
An increased credit limit means increased buying power. If you’ve got your finances in hand but want a way to pay for holiday gifts without depleting your cash, then getting an increase on your limit can be a good way to do it. It’s important to have a plan in place to repay what you charge, though.
Likewise, having a higher credit limit can work in your favor if your balance is low. That’s because credit utilization accounts for 30% of your credit score. (Credit utilization is your total outstanding balance as a percentage of the total credit available.) If increasing your limit can help you improve your utilization, you could see a bump in your credit score too.
If you have a rewards card, then a higher limit could allow you to earn bigger rewards this holiday season. If you’re trying to accrue miles for a family vacation or points for a big purchase, it could be worthwhile to ask for an increase.
As you can see, there are some potential benefits to increasing your credit limit. But, you’ve got to weigh those against the risks.
The Risks of Increasing Your Credit Limit
You’re probably not surprised to learn that there are risks associated with upping your credit limit. It’s important to understand them before you approach your lender.
For some people, an increased limit translates to an irresistible urge to spend up to the limit whether they can afford it or not. If that sounds familiar, you should think carefully before you ask for that increase. You should only charge what you can afford to pay.
At the holidays, credit card companies sometimes offer deals that come with strings attached, such as no interest cards. They’re usually contingent on paying your entire balance within a specified grace period. Make sure you understand the conditions before you get a new card.
A higher balance on your card could result in a decreased credit score in some cases. That’s because credit utilization, which we mentioned above, comes into play if you’ve got a high outstanding balance as a percentage of your available credit.
You’ve got to weigh the potential risks of a higher credit limit against the benefits. It’s not something you should do without careful consideration.
So, Should You Increase Your Limit?
Now that you understand the risks and rewards of increasing your credit limit before you begin your holiday shopping? We can’t answer that question for you, but here are some pointers to help you decide.
It might be a good idea to request an increase on your credit limit if at least one of these things is true:
You’ve got a solid credit history and you’ve made payments on time
Your income is higher than it was when you first got the card (or got your last increase)
Your expenses are lower than they were when you first got the card
Your balance is well below your current limit
You only plan to buy what you can afford
On the other hand, it’s a bad idea to bump your limit if:
You’re currently maxed out on all your cards
You want to purchase gifts that you couldn’t afford otherwise
You’re under financial stress
You’re struggling to make your current credit card payments
It’s important to be honest with yourself about your current financial situation and why you want the increase. There are alternatives to buying expensive holiday gifts and you can avail yourself of them instead of increasing your credit card limit.
There’s nothing wrong with buying holiday gifts on credit, but it’s important to stop and think before you call and ask for an increase to your current credit limit. Be honest about why you want the increased limit and practical about your ability to take on more debt and you’ll make the right choice.
In the market for a new credit card before you start your holiday shopping? Click here to check out Addition Financial’s flexible credit card options.