How to increase your credit limit – and should you?

By: Steven Brennan on January 8, 2025

On the face of it, a credit limit increase sounds like a no-brainer. And if your bank offers one up without the hassle of a formal application, that’s even better. Right?

The truth is that while a credit limit increase can bring some genuine benefits to your finances, there are also some potential drawbacks to consider before you jump in.

Why banks offer pre-approved credit increases

A pre-approved credit limit increase is a sign that your lender considers you a reliable borrower. Credit limit increases are typically extended to cardholders who demonstrate responsible credit habits, such as making payments on time, paying more than the minimum amount, and showing evidence of a stable income.

For banks, this is a strategic move. A higher credit limit encourages more spending, which can lead to increased transaction fees and potentially higher interest revenue. It also helps retain customers by increasing their financial flexibility and reducing the chances they’ll look elsewhere for credit.

Unlike a formal credit limit request, a pre-approved increase is proactively offered based on the cardholder’s most recent credit behaviour and income, making them a quick, low-risk decision for lenders.

The benefits of accepting a credit limit increase

For consumers, accepting a credit limit increase can offer several advantages, especially if you manage your credit responsibly.

As mentioned earlier, a higher credit limit brings you greater purchasing power and financial flexibility. Whether you’re handling unexpected costs or planning a large purchase – for example, a big home renovation – the extra available credit can act as a cushion to help spread your expenses into more manageable payments and avoid pushing against your limit.

And if you’re working with a credit card with cash back or points, a higher credit limit could help you maximize the benefits there -- without maxing out your card at the same time.

Plus, other lenders might view a higher credit limit as a sign that you’re also a trustworthy borrower, which could perhaps improve your chances of approval for something like a car loan, for example.

But undoubtedly one of the biggest benefits of accepting a credit limit increase is that, when used responsibly, it can actually improve your credit score.

How a credit limit increase can boost your credit score

Your credit utilization ratio, or debt-to-credit ratio, is the percentage of credit you actually use compared to your total limit. Credit monitoring agency Equifax notes that lenders generally prefer credit utilization ratios to be no more than 30%.

This is worth paying attention to since your debt-to-credit ratio is one of the biggest elements that credit bureaus consider when evaluating your credit score.

Keeping that ratio at 30% or lower, however, can be a challenge. For example, if you tend to spend around $500 a month on your credit card and your credit limit is $1,500, your credit utilization would still exceed the ideal figure, at 33%.

But if that limit were increased to $2,000 and your spending habits remained the same then your credit utilization would decrease to 25%. That kind of drop could well result in a solid boost to your credit score, provided you maintain your credit habits.

Potential drawbacks of increasing your credit limit

Along with some benefits with increasing your credit limit, there are some potential drawbacks to consider.

More available credit means potential for more debt, which could be a slippery slope if you don’t stay on top of payments. With a higher credit limit, it can become easy to justify purchases you might otherwise avoid, potentially leading to debt that’s difficult to pay off.

If the lender performs a hard inquiry when processing your application for an increase, there is potential impact on your credit score.

Generally, pre-approved offers typically don’t involve a hard credit check, but a formal request for a limit increase often does, and this is likely to ding your credit score, albeit temporarily.

When to consider declining a credit limit increase

Given these potential downsides, there are scenarios where considering declining a credit limit increase could make sense.

These include:

If you’re struggling with overspending or needing to rein in your budget, a higher limit could tempt you into taking on unnecessary debt.

If you’re planning to apply for a major loan, like a mortgage, in the near future, a hard credit check can temporarily lower your credit score and thus affect your available loan terms and rates.

Ultimately, the decision should align with your financial goals and spending habits. Declining a credit limit increase isn’t a missed opportunity if it helps you maintain control over your finances.

Manage your higher credit limit responsibly

If you do decide to take on a higher credit limit, you should view it as a tool for improving your financial health, rather than an excuse to increase your spending.

Above all, maintaining a low balance relative to your limit will help keep your credit utilization ratio low, and allow you to enjoy what is arguably the biggest benefit of a credit limit increase.

Not sure which credit card is right for you? Take a look at our list of the best credit cards on LowestRates.ca. It’s an easy way to find the card that fits your financial goals, while helping you stay on top of managing your finances responsibly.