One of the big challenges of managing credit cards is knowing if you should apply for a credit limit increase or avoid upping your card’s spending cap. Some might assume that having a higher spending limit is a good thing, but if you’re already struggling with debt and start to spend more, it can become more difficult to manage.
There are a number of things to consider before applying for a credit card limit increase or accepting one — especially if you’re already struggling to manage your debt. Can increasing your credit limit be risky? When would it be beneficial to apply for a credit card limit increase?
Let’s take a look at how credit card limit increases work, some of the specific rules for managing limit increases in Canada, and other tidbits about managing credit cards.
How Does a Credit Limit Increase Work?
While the specific process may vary from one credit card provider to the next, the basic method of increasing a credit card limit can be summarized in a few simple steps:
- You contact your lender or credit card provider requesting a credit limit increase, which can include renegotiating the terms on your credit card account. This is often done through an online form on the lender’s website, via your bank’s phone app if you do online banking, or by calling the credit card provider’s customer service directly.
- The lender reviews your application for a credit card limit increase, which includes checking your credit report with one or both credit bureaus (Equifax and TransUnion). This results in a “hard inquiry” which can impact your credit score. Lenders may review both your credit history and credit score during this process to determine your eligibility for a credit card limit increase.
- The lender sends you a notification approving or disapproving of the new credit limit. If your credit limit increase request is approved, the lender will also notify you of your new terms (if any) on your account, in writing.
How Do I Qualify for a Credit Limit Increase?
If you have a good credit score, a positive credit history, and you’ve never missed a payment on your credit card(s), there’s a good chance your lender will approve a request to increase your credit limit without any issue.
In some cases, you may be offered a credit limit increase without ever requesting one.
For example, you may receive a letter from your credit card provider indicating that you’re eligible for a credit card limit increase of a certain amount, which you can accept by a certain date. Or you may receive a notification via your bank’s phone app — if you do online banking — notifying you that you’ve qualified for a credit card limit increase.
Can a Lender Increase My Credit Limit without My Permission?
No — at least, a Canadian credit card issuer cannot increase your credit card limit without getting express consent from you first. That means you must confirm, either verbally or in writing, that you agree to the credit limit increase.
Why Can’t I Increase My Credit Limit?
When you request a credit limit increase, your credit card provider may deny your request. The reasons vary, but can include:
- Your limit is too high already
- A poor credit score
- Previously missed payments
- A recent increase to your limit
- Errors in your request for a credit card limit increase
Sometimes a credit card provider may ask for your income information when determining if they should increase your credit limit. If the information you provide is different from what they have on file, they may decline or disapprove your request for a credit limit increase.
These are just a few of the potential reasons why a credit card company might not agree to up your credit limit.
Is Increasing Your Credit Limit a Good Idea?
If you’ve saved up for a big purchase that must be made using a credit card — such as a family vacation — then an increase to your credit limit can be useful. However, if you’re relying on credit to make ends meet and make up for shortcomings in your income, an increase in your credit limit could make it more difficult to keep up with monthly bill payments and get out of debt.
A general good rule of thumb when it comes to using credit is to avoid spending more than what you can pay off in full by the end of the next billing period. Otherwise, it can become a slippery slope of relying on credit versus your income to cover your expenses, which isn’t sustainable.
Some might argue that increasing your credit limit can come in handy during an emergency situation, like losing your job. However, relying on credit to make ends meet — even if it is an “emergency” situation — can place you in a precarious financial situation where it can become extremely difficult to catch up and pay off the credit card in full.
Instead, consider saving a portion of your income every paycheque specifically to cover emergency expenses. We know emergencies can happen all the time — whether it’s a car repair, vet bill, or dental work — so it’s important to save for them.
Is an Increase in Your Credit Limit Good for Your Credit Score?
Some people might say that increasing your credit limit reduces your credit utilization rate, which can increase your credit score. But is this true?
Increasing your credit card spending limit can help reduce your overall credit utilization rate—which can be helpful for building a good credit score. But that’s only the case if your credit utilization rate is high (most experts would agree that maintaining a credit utilization rate below 30% is ideal) or if you’ve maxed out your credit. And if that’s the case, it can be very tempting to use that additional credit once it's been granted, which will drive your overall credit utilization rate back up and not help your credit score.
The truth is you do not need a lot of credit to increase your credit score. You just need a good credit history, which includes making your monthly payments on time and keeping your credit card balances low.
Can an Increase in Your Credit Limit Help You Earn More Rewards?
Another potential benefit of increasing your credit limit with a specific card issuer is that it can help you earn more rewards points with that card. However, you can still earn generous rewards with a credit card that has a $500 credit limit as opposed to a $5,000 credit limit.
Increasing your credit limit just to earn more rewards can lead you to spend more, which can make for a very difficult financial situation.
What Are Some of the Negatives of Applying for a Credit Limit Increase?
Some of the drawbacks of increasing your credit card limit include:
- It Can Be Tempting to Overspend. What happens when your credit limit is several times larger than what you can comfortably pay back in a single month? If you have a high limit, that can tempt you into making big purchases that you might not have otherwise considered. It’s all too easy to give in to the “buy now pay later” mindset.
- You May End Up Losing More Money to Interest. If you start spending closer to your maximum credit limit, you will be paying a significantly larger amount of money just on interest. For example, if you have a balance of $1,000 on a credit card with a 25% APR interest rate, that’s almost $0.70 a day of interest—or over $20 for a 30-day month. However, if your balance is $10,000 at 25% APR, that’s almost $7 a day in interest (or over $200/month). If you paid $250, less than $230 of that would go towards the balance if you only owed $1,000—letting you pay it off in less than half a year. Meanwhile, with a $10,000 debt, that would be less than $45 going towards your debt. It would take years to repay the entire balance at that rate—and that’s if you didn’t spend anything on that card again.
- Hard Inquiries Can Impact Your Credit. A hard inquiry on your credit report won’t usually impact your credit score much. However, if you have a lot of hard inquiries in a short period of time, it can hurt your credit score. A credit check by a lender counts as a hard inquiry—and repeatedly asking for limit increases can generate numerous hard inquiries that can hurt your score. How long does this impact last? Each inquiry can stay on your report for up to 36 months.
What Can I Do if I’ve Increased My Credit Limit and Spent Too Much?
So, what can you do if you end up overspending after increasing your credit limit? There are a few things that you can consider if you owe too much on your credit cards:
1. Speak to a Certified Credit Counsellor
Some people might recommend doing a credit card balance transfer, applying for a line of credit through your bank, or getting a debt consolidation loan if you’re dealing with excessive credit card debt.
These can all be viable solutions, but if your debt-to-income ratio is high and your credit utilization rate is also quite high, you might not qualify for any of these options, with the end result being just another hard inquiry on your credit report.
For this reason, it’s best to consult an unbiased expert, like a certified credit counsellor from a not-for-profit credit counselling agency, if you’re struggling to keep up with your monthly credit card payments.
They can review options like credit card balance transfers, lines of credit, and debt consolidation, weigh their pros and cons, and recommend a solution that’s right for you.
2. Using a Line of Credit to Pay Off Credit Card Debt
Paying your credit card debt with a line of credit from your bank (or other lending institution) is somewhat similar to a credit card balance transfer. However, there are a few key differences that can make a big difference.
For example, a line of credit typically has a lower interest rate than a credit card. Some lines of credit can also be secured by collateral—which often results in a very low interest rate.
Since this isn’t just an “introductory” interest rate—as may be the case with a credit card balance transfer—a line of credit may be more attractive to help you save money.
However, it’s important to note that some lines of credit have variable interest rates that may fluctuate with the bank’s prime lending rate (meaning they can go up or down).
And again, it may be difficult to qualify for a line of credit if you’re already struggling with debt.
3. Getting a Debt Consolidation Loan to Pay Off Debt
A debt consolidation loan can be an alternative to taking out a line of credit, but just like a line of credit, it may be difficult to get approved for one if you don’t have good credit.
Also, if you were granted a debt consolidation loan from your bank, they may choose to only consolidate the unsecured debts you have with them directly (e.g., MasterCard, Visa, line of credit, etc.) and not any other unsecured debts you may have with other creditors and lenders.
A debt consolidation loan is different from taking out a personal line of credit in that the loan is a non-revolving piece of credit extended to you once. You get the entire amount of money at once and then you pay it back over time.
With a line of credit, however, you can borrow up to a set limit. Then, as you pay off the amount or portion you borrowed, you can borrow more if needed up to that set limit (similar to how a credit card works).
To qualify for either a debt consolidation loan or a personal line of credit, you will need to pass a credit check with the lender. If your credit score is high, you’re more likely to get approved (and receive benefits like lower interest rates or higher loan/credit amounts).
4. Sign Up for a Debt Consolidation Program
If you have a low credit score that keeps you from qualifying for certain debt solutions, you can consider free credit counselling services.
A certified credit counsellor can help you find alternative methods for getting out of excessive credit card debt—including a debt consolidation program (DCP).
A DCP is an agreement that a credit counsellor helps you make with your creditors to help you repay your outstanding debt. The counsellor negotiates on your behalf to stop or reduce the interest on your outstanding unsecured debt. They’ll also combine all of the debts on the program into a single lower monthly payment.
Since a DCP is not a loan, you don’t have to pass a credit check to qualify for a DCP—making it a great option for those who aren’t able to get a consolidation loan, line of credit, or a credit card balance transfer with a great interest rate.
When you sign up for a DCP, you give up your unsecured credit cards, which removes the temptation of racking up more debt. In most cases, DCP clients have maxed out their credit anyway, so refraining from using their credit cards is usually not an issue.
5. You Can Consider Insolvency
If you’re in debt and you’ve run out of options, you can contact a Licensed Insolvency Trustee (LIT) like Spergel to discuss filing a consumer proposal or for bankruptcy.
In a consumer proposal (CP), you agree to pay a portion of the debt you owe your creditors or get them to extend the time you have to pay off the debt (or both). The amount you pay is based on your income and assets at the time of filing for the CP. This option typically lets you keep your assets—though, your creditors can reject the proposal.
Declaring bankruptcy can also be an option—but there are costs.
For example, even if you receive a bankruptcy discharge, your creditors still need to recover their own losses. So, during the bankruptcy process, some of your assets might be seized and sold off to cover your debts.
Need Help Finding the Best Debt Solution for You?
If you’re facing an excessive amount of debt because you’ve spent too close to your credit limit and are struggling to make your minimum monthly payments, Credit Canada is here to help. Our certified credit counsellors can discuss your current debt situation and help you find the best debt relief strategy for your needs.
Why wait? Get the help you need as soon as possible by reaching out to us now!
