Is It Better to Seek a Credit Card Limit Increase or Open a New Account?
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If you’re looking to improve your credit history and boost your credit scores, you might be mulling over whether to seek a credit card limit increase or open a new line of credit. Both options would increase your total available credit and lower your utilization rate. However, they will also prompt a hard inquiry on your credit reports, which will lower your credit scores slightly.
When to consider a credit limit increase
It’s generally recommended that you have two or three major credit card accounts, in addition to other types of financing such as student loans, an auto loan or a mortgage. This is because lenders like to see a wide variety of credit types on your credit reports. It suggests to them that you’re able to balance multiple commitments at one time. However, you should be careful with the number of credit cards you open. Once you go beyond two or three cards, keeping track of monthly payments could get confusing, especially if the accounts have different due dates.
So if you already have multiple cards (or even just one that you find difficult to keep up with), it’s probably best to request a credit limit increase. That way, there will be no changes to the number of monthly payments you have to make and you won’t have to keep track of multiple cards, each with its own interest rate, rewards and fees.
Though increasing your credit limit will hurt your credit scores slightly in the short term, it can also improve your debt to credit ratio, which is the amount of credit you're using compared to the total amount available to you. Remember, however, if you do decide to increase your limit, you should resist the urge to spend up to that limit. Otherwise, you’ll increase your utilization ratio and create further damage to your credit scores.
Card issuers will likely grant you an increase if you have strong credit scores and a history of timely payments. However, if you have a record of late or missed payments, you might be denied an increase and eventually face a lower credit limit.
When can you benefit from a new line of credit?
Although a limit increase is preferable for people who already have a few credit cards, opening a new account might be a good idea if you have only one card. In fact, your credit scores will be enhanced by getting a second line of credit, despite the initial decrease that results from a hard credit inquiry.
In order to build a positive credit history, pay off the balance on each card in full every month and keep all of the accounts active. Try using a new card to pay for something you were going to purchase anyway and that you know you’ll be able to pay off, such as gas, groceries or utility bills.
Credit card rewards are another reason to choose a new card over a credit limit increase. For example, if you fly a lot, you could get an airline rewards card and eventually earn a free flight across the country.
Whichever option you choose, remember to check your credit reports frequently, pay your monthly bills on time, avoid spending beyond your means and use your new credit wisely.