A high credit score is a valuable asset since it can lower your interest rate on important purchases like a home or a car. To increase your credit score, you'll have to be responsible with your credit. An increased credit limit will affect your FICO score, which is the industry-standard credit score created by the Fair Isaac Corporation. Whether the effect is negative or positive depends in large part on how you use your credit.
Credit utilization is a measure of how much of your credit you're using. For example, if you have a $10,000 credit line and carry a balance of $4,000, your credit utilization is 40 percent. Your credit score will suffer if your credit utilization is high. If you increase your credit line and use all of the newly available credit, your credit utilization will skyrocket and damage your score. If you don't use any of your new credit, your score may actually increase, since the increased limit will reduce your credit utilization percentage.
The amount you owe on your credit cards plays a role in determining your FICO score. Along with credit utilization, the amount of debt you carry makes up 30 percent of your total score. With an increased credit limit, you may end up incurring more debt, raising the amount that you owe. Along with the hit your score will take from an increased credit utilization percentage, the rise in your overall debt level will further damage your score. Paying down your debt, on the other hand, is a great way to raise your score.
If your credit limit increased because you opened a new account, your score may take a dip. Even the act of applying for an account, known as a credit inquiry, appears on your credit report and can help lower your score. However, the FICO scoring model assigns just a 10-percent weighting to new accounts and inquiries, so your damage from this category is typically small. If your increased credit line comes from an existing account, your score in this category won't be hurt at all.
While your FICO credit score can be important to lenders, other factors often play a role in determining your ability to get a good loan. In addition to your credit score, lenders might look at your income, assets or other financial metrics to determine your overall credit profile. For some lenders, an increased credit limit could demonstrate that other lenders have faith in your ability to repay a loan. In other cases, an higher credit line might indicate greater potential risk that you may become overextended.
After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.