Should you accept that pre-approved credit limit increase?

Receiving an offer for a pre-approved credit card limit increase can feel like a financial compliment, or even a recognition of your responsible spending habits. For many, it’s an easy way to increase your purchasing power and credit score. But before accepting, you may want to consider the potential benefits and risks.

Why banks offer pre-approved credit increases

Banks offer pre-approved credit increases for several reasons, including:

1. Encouraging greater spending and profitability: A higher credit limit can lead to increased spending, which generates more revenue for the bank through transaction fees and potential interest on any balance.
2. Rewarding responsible behaviour: Banks will often offer pre-approved increases to customers with a history of on-time payments and consistent credit use to strengthen relationships with reliable borrowers.
3. Competing for customer loyalty: By offering more credit, a lender positions themselves as a preferred financial partner, reducing the likelihood that customers will seek out credit from competing lenders.

The benefits of accepting a credit limit increase

Accepting a credit limit increase can offer several financial advantages if managed wisely. Here are the key benefits:

• Improved credit utilization ratio: Your credit utilization ratio is the percentage of your total available credit that you're using. If you maintain your current spending habits, a higher credit limit can lower this ratio, which is a significant factor in determining your credit score. For example, if you have a $1,000 balance on a card with a $5,000 limit, increasing the limit to $7,500 reduces your utilization from 20% to 13%.
• Higher credit score potential: A lower utilization ratio and the ability to responsibly manage a higher credit limit can have a positive impact on your credit score, making it easier to qualify for loans, mortgages, or other financial products at better interest rates.
• Increased financial flexibility: A higher limit can provide a safety net for emergencies or large, unexpected expenses, allowing you to manage your cash flow more easily. (However, you should never confuse your credit card with an actual emergency fund, as credit cards also come with very high interest rates).
• Potential rewards maximization: With a higher limit, you may feel more comfortable using your credit card for larger purchases or regular spending. With the right credit card, you can accumulate rewards points, cashback, or miles faster.
  Related: Beginner’s guide to credit card points
• Improved perception by lenders: A higher credit limit can signal to future lenders that you are a trustworthy borrower, especially if you continue to use credit responsibly and make timely payments.

Potential drawbacks of increasing your credit limit

While increasing your credit limit has potential benefits, it also comes with risks that should not be overlooked.

The risk of overspending

One of the biggest drawbacks of increasing your credit limit is the temptation to spend beyond your means, potentially leading to higher credit card balances and increased debt. If overspending leads to carrying a balance from month to month, you’ll end up paying more in interest.

Even small increases in spending can add up over time, especially for cards with higher interest rates. In the longer term, carrying a balance and missing payments can also have negative effects on your credit score, and impact your application for other financial products, such as a mortgage or car loan.

Hard checks can ding your credit score

In some cases, a credit limit increase may trigger a hard inquiry on your credit report, which could temporarily lower your credit score by a few points. While pre-approved increases typically avoid this, you should confirm with your lender before accepting a pre-approved increase. Additionally, with a higher limit, you may be exposed to greater financial loss if your card is ever stolen or misused.

Read more: How to dispute your credit score in Canada

When to consider declining a credit limit increase

Declining a credit limit increase makes sense in certain situations, especially if the potential drawbacks outweigh the benefits for your financial position. Here are some cases where it may be wise to say no to a credit limit increase:

• You’re struggling with overspending.
• Having an increased limit would lead to increased spending.
• You’re focused on paying down debt.
• Your financial situation doesn’t require you to have additional credit.
• You’re concerned about credit card fraud.
• Your current credit limit meets your needs.

Declining a credit limit increase is not a sign of financial weakness – it can be an intentional choice to stay aligned with your goals and spending habits.

Tips for managing a higher credit limit responsibly

Managing a higher credit limit responsibly requires discipline and strategic planning. Here are some practical tips to help you make the most of an increased credit limit:

Stick to a budget and avoid overspending

Create and follow a monthly budget that prioritizes expenses, savings, and debt repayment. Use your credit card for planned purchases within your budget, and pay off the balance in full each month. Treat your higher limit as a safety net, not as extra spending money.

Maintain a low credit utilization ratio

Aim to keep your credit utilization ratio below 30% (ideally below 10%) of your total credit limit. For example, if your new limit is $10,000, try to use no more than $1,000 to $3,000 at any given time.

Pay your balance in full and on time

Avoid carrying a balance whenever possible to prevent accumulating interest charges. Set up automatic payments or calendar reminders to ensure you never miss a due date.

Set personal spending limits

Even if your credit card issuer increases your limit, set a personal spending cap that aligns with your budget. For instance, if your limit is $15,000, you might decide to keep your spending below $5,000 per month. Keep your credit card use to planned expenses, such as recurring bills or pre-budgeted larger purchases. Avoid impulsive or unplanned spending.

Build an emergency fund

A higher credit limit can provide temporary relief in emergencies, but it’s better to rely on savings whenever possible. Build an emergency fund to reduce dependence on credit for unexpected expenses.

Treat it as a credit score tool

Leverage the increased limit to improve your credit utilization ratio and, consequently, your credit score. Avoid viewing the higher limit as permission to borrow more.

Monitor your credit activity

Regularly review your credit card statements and credit report to ensure there are no errors or unauthorized charges. A higher limit can make you a more attractive target for fraud, so awareness is key.

When used wisely, a higher credit limit can support your financial goals and help you succeed in the long run. However, to make the most of it, it's important to manage it carefully. Avoid overspending, keep your balances low, and make sure to pay on time.

Read next: Is credit card balance protection insurance worthwhile?