A friend recently contacted me to share some great news about her progress on getting out of debt:
I wanted to personally tell you that after reading your book (again), and really underlining things, I have made huge steps to get out of debt. I had great conversations with family and friends about money. Most recently I finally paid off my credit cards! I’ve been struggling for so long. And to not have any card debt is huge for me. I have been in some sort of debt to credit, car, etc. for my entire adult life and I have been trying to identify the emotional aspect of it. And seriously, I hadn’t always thought about it that way. So thank you!
I have a question - now that I have no credit card debt, I have the option to increase my credit limit. Should I do this for any reason? I don’t really need a bigger credit line but should I??
Wow. This actually made me tear up a bit. I remember how scary and depressing it was for me to be under tremendous debt. I am so proud of and happy for my friend. One of the 10 Critical Habits of Truly Rich People that I write about in my book is Habit No. 3: Truly Rich People Leverage Credit But Manage Debt. This habit is all about how to dig out of debt, understand how credit works and learning how to make credit work for you.
My friend's question about the credit line increase decision can be tricky. It depends on a combination of things such as your:
future credit needs
current outstanding debt
current available credit, &
current credit rating
For instance, let’s say you have a future goal to make a big purchase (car, property, renovations, etc.) which requires financing. If your credit score is on the low side it could impact your ability to secure the financing to make the purchase. Furthermore, if the amount of your existing debt is more than your available credit, it can negatively impact your credit score and the amount of financing you can secure. If increasing your credit card limit would materially change your debt to credit ratio positively, it could improve your credit score and financing options.
That is a financial reason to consider increasing your line. Another reason could be for emotional wealth purposes. For instance, I have a line of credit that I do not use or plan to use in the future. But with 3 kids in college and all I have going on, it gives me peace of mind to know I have the this cushion and would not have to go into savings or disrupt my investments should something happen.
However, notwithstanding the above two reasons to consider raising your credit limit, the biggest risk in increasing a credit line is that you will use it! The debt to credit ratio I just mentioned that can improve your credit score is a debt to (available) credit ratio, so the increased credit has to be available - in other words, unused.
Second, it also goes without saying that you wouldn’t want to go back down that road of being in credit card debt.
Third, if you use the increased credit amount and thereby increase your outstanding debt, you’ll end up depleting your emotional wealth rather than building it.
Lastly, even if you are confident that you wouldn’t use the increased credit, before accepting the increase make sure you review the terms of the increase for any hidden fees or increased interest rates.