Why Declining a Credit Limit Increase May be a Good Idea

Posted on August 5, 2021

On the surface, a credit limit increase almost sounds like a reward. Used correctly, it could be. As with many financial decisions, however, the devil is in the details.

With so many Canadians still hurting from the effects of the pandemic, it's a tempting prospect. In fact, as of April 2021, over half the country (53 percent) was within $200 of not being able to cover bills.

A credit boost can seem like a (temporary) way out. Before saying yes, though, it's important to look at credit limit increases from every angle.

What is Credit Limit Increase?

Your credit limit is the amount of money that you can legally borrow across all accounts. For example, having three credit cards at $10,000 each would give you a $30,000 credit limit.

Other factors that can weigh on your credit limit include the money you borrow from a bank (mortgages, personal loans, lines of credit) or store (in-store financing, retail charge cards). Often, credit card companies or the banks backing them might send you an offer that says "pre-approved credit limit increase." 

A great deal until it's not! As you're about to see, it's not always a clear cut decision. 

Should I Accept a Credit Limit Increase 

It's important to understand where your reservations are originating. In this section, we will detail the factors that you need to think about before making your decision.

Think About Why You Were Offered the Increase

Let's get back to that pre-approved credit card limit increase. What is motivating the company to reach out to you in such a manner? Well, the short answer is that they'd like to make more money off you. 

Some companies do this responsibly while others might observe what would otherwise be alarming details about your credit behaviours. It's possible they see you as a spender, and their hope is that you will spend even more money you don't actually have. 

That leads to not paying debts at the end of the month, which, in turn, allows them to make more money off interest rates over time. Examining your own financial behaviours, which we'll go into further later in this article, is essential to not falling into such credit traps. 

Think About Your Current Lifestyle

Your lifestyle and relationship with money is a huge factor in whether you should accept or deny a credit limit increase. Good relationships look something like this: 

  • You pay off your credit cards at the end of each month to not accrue any interest
  • You don't use high-interest credit cards at all but opt for low-interest personal loans for big-ticket items instead
  • You keep enough emergency cash to not use credit at all
  • You know exactly how much you're bringing home and how much you're spending and using on expenses every month

Each of these factors demonstrates that you will likely handle any changes to your credit limit well. It's best to ensure they're all in place before saying yes. 

Think About What You Would Do With the Boost

Perhaps this is something of an offshoot of the last section, but it bears emphasis. What do you actually need a credit limit increase for? Are you saying yes because it's there, or do you have serious expenses on the horizon that you can't address at current income levels? 

Before you say no, look at your current expenses. Cut any unnecessary spending that you can. Then, examine all the areas of your life where the unexpected might occur. 

These include home repairs, automobile purchases, medical expenses (especially if you don't have private health insurance), or paying for long-term care for a close family member. Life makes certain demands on you from time to time, and it's not always possible to pay for things from the cash you have on hand. 

Will Accepting a Credit Limit Increase Improve My Credit Score?

It’s a common belief that having a higher credit limit on your credit card will help your credit score. This isn’t always the case, though. A higher credit limit only helps you if you’re using a smaller percentage of that limit.

It’s important to have a good credit score because it impacts many areas of your life. A good credit score is needed to get a mortgage, a car loan, to rent an apartment, to get a job (in many cases), or to get approved for a credit card.

When you're denied a credit limit increase, it generally doesn't affect your credit score. Assuming you are the one seeking the credit limit increase in this scenario, it's a simple yes or no answer from the company given out without doing what is called a "hard pull" on your credit. 

A "hard pull" is the term for getting your full credit report from an official credit reporting bureau. This indicates that you plan to borrow more money, thus upping the probability of an increase in your credit utilization ratio. (Something many Canadians were clearly doing as of December 2020 with households owing an average of $1.71 for every $1 of disposable income, according to BNN Bloomberg.) 

That said, if you maintain the same credit limit, paying bills on time while increasing your credit limit, your score could actually improve. That's because you're using a lower percentage of what is available to you. 

When It Makes Sense to Say No

You got the offer to increase your credit limit. Now what? As noted, there are reasons to say yes, but they're not always reasons that are present for a large number of Canadians receiving them. 

It oftentimes makes sense to say no. As discussed, denying the increase won't necessarily hurt your score. Your score might also improve exponentially because you're avoiding these four disadvantages of saying yes. 

Higher Credit Limits Can Encourage More Spending

Higher credit limits can lull you into a false sense of security. You can start to look at this nonexistent money as your emergency fund when it's not actually that at all.

Let's say you're happy because you got a $10,000 credit limit increase because you have $3,000 in upcoming repairs to do, and you're living paycheque to paycheque.

You pay for the $3,000 with your credit bump and still have $7,000 in extra credit available. Great, except for the fact that now you have to think about servicing that debt.

If you're paying 15 percent interest on that until you can get it paid off, then you could end up paying hundreds, even thousands more in interest over time. Remember: you're already living paycheque to paycheque, so you don't have the money to pay on the principal, which means more minimum payments that do nothing to shrink the debt. This is how a country gets to over $2 trillion in consumer debt.

More Spending Means Potentially Paying More Interest

If you're doing searches like, "Does a line of credit affect my credit score?" then your head is in the right place. You're going after lower-interest debt to pay for whatever your upcoming needs are. 

You're still paying interest, though. If it's a variable rate, then it could rise with the economic tides, but even a fixed rate is going to be more than if you had the money to pay cash upfront. 

Ideally, you want to convince yourself that you have to pay off whatever credit you use at the end of every month. That will keep you from ever paying a dime in interest. It's tough to get there overnight, particularly when you've fallen behind, but it's doable so long as you commit to the path.

They Can Stop Momentum for an Emergency Fund

This only makes sense. When all your money is going to service debt and pay interest on purchases you didn't have the money for in the first place, how are you ever going to create the emergency fund necessary to get off the cycle of credit use? You have to start somewhere, and any action you take that prohibits responsible financial behaviour will make it more difficult to get there.

They Can Also Lower Your Credit Score

Credit limit increases that are attached to higher spending will not give you the advantage that comes from a lowering of your credit utilization ratio. It will actually have the opposite effect. That's because it's noting to the reporting bureaus that you're having to finance most of your lifestyle.

Whatever the limit of the credit increase is doesn't matter. You should always say no if you are still making the same amount of money when it's offered to you. Negative information can stay on your credit report for longer than you think, so treat this decision with care.

Make the Right Decision Now

Accepting a credit limit increase is a decision worth thinking about. There are ways that it can go right for you, but there are disadvantages that can keep you in an unhealthy financial state.

Take some time to examine your financial behaviours, particularly your current lifestyle and relationship with money. Maintain control of your budget, think about how you plan to use the money, and figure out how you will exercise fiscal responsibility after you've made your decision. 

Are you ready to reexamine where you are with your money? Do you think you could benefit from lower interest rates on existing debt? Let Insurdinary help you find the right solutions today!

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