Many people ask me how your credit limit effects your risk score. If your credit card company increases your credit limit, how will this effect your risk score? Your credit limit is a direct reflection of your banks confidence in the way you manage your finances. So if they increase your credit limit or your spending maximum, your bank is expressing a new level of confidence in you and your finances. Your credit risk rating directly reflects this confidence.
Your credit risk ratings and your revolving credit balance limits are directly related, and tend to move upwards or downwards together. However your credit behavior with any new credit limit increase will affect your score more than the credit limit increase itself. Your revolving credit card balance limits and your risk scores do have differences, albeit very subtle. While your credit limit is decided upon by the bank, your risk score is a product of your behavior with credit. Your open balances and your payments effect this risk score. The risk scores are calculated to help the bank decide what your credit limit should be.
How do banks decide what your credit limit should be? They take into account several key factors. The first factor is extremely important, they take into account your stated income. Next the banks study your past spending and payment history, as this is very telling about your abilty to handle money, and it is directly related to how responsible you are with your credit and how serious you are about paying back your debts in a timely manner. People with low open balances tend to be a better risk since they are not over extending their credit. The last aspect your bank examines is your risk score. Your risk score is more opinion than fact, while your stated income and payment history is factual information.
Your risk score places a heavy emphasis on your credit utilization threshold. This means the more of your available credit that you are using, the lower your risk rating will be. The sum of your revolving credit debts are taken into account here, loan debt does not count towards this data, only revolving credit does. Your risk score takes into account each and every accounts payment history on file for you. The open balance is decided upon by the user, while the credit limit is set by the lender. Your balances are a direct result of your behaviors and freedom of choice, while your credit limit is set according to the banks opinion on you and your risk score.
Your credit score and risk score can increase if the bank raises your credit limit without you asking for a credit limit increase. However your score only receives a boost if you do not utilize this extra credit and keep a low balance. With revolving credit the less you use the better your score will be. If your balance remains the same or is reduced while your credit limit increases this results in an improved score. The score improves because you are showing restraint in your spending habits and not overextending yourself credit wise. It shows that you can handle the credit you were given responsibly. If you keep your credit utilization low your risk score will improve.
Now a credit limit increase can hurt your score as well. When can an increase hurt your credit scores? When you initiate the credit limit increase by requesting it from the bank. The reasons for this is that it signals to the bank that you intend on spending your current credit limit plus the additional credit limit increase or else you would not be asking for an increase. Basically if the credit limit increase occurs in tandem with higher spending on the account your scores will suffer. If new accounts are opened during this time your score could further tank. If you ask for a credit limit increase it could result in a hard inquiry as well which also lowers your credit score. You should ask the bank if you do request a credit limit increase to use a soft inquiry instead so that your credit score will not suffer a temporary ding.