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Pre-approved Credit Card Increase: What’s best, accept or decline?

If you own a credit card, at some point you might receive a letter in the mail that reads something like, “Congratulations! You have been pre-approved for a credit increase!”

Some people receive these letters but don’t know why. They’re left wondering, Should I go for it and accept the credit increase, or add the letter to the junk mail pile?

The answer depends on you, your credit history, and your money habits. There’s a lot to consider.

Why you’re being offered more credit

A credit limit is a maximum amount you have available to spend on a credit card at any point in time. A credit increase means the lender has approved you to spend more.

An offer for more credit on your card is a reward (sort of). If you always make credit card payments on time and you’re a good customer, a credit increase is the lender’s way of thanking you.

CAUTION: It isn’t really a gift. Even though a credit card increase might seem like a gift, you don’t need to accept it.

Depending on your financial situation, a credit card increase might be a good thing. It might also be a terrible idea. Consider the pros and cons:

Pros: Reasons to accept a credit increase

There are definitely benefits to having more credit available on your card:

Greater spending power

With more money to borrow, you’ll have more to spend. Want to take a trip? Replace the old TV? Get a new roof? Having extra credit gives you options.

Emergency funds

In case of job loss, major car repairs, or a big vet bill… you’re covered. Just remember, this is a loan and will need to be repaid.

No hard check

If a lender pre-approves you for a credit increase, they look into your credit report. Normally, when someone does a “hard credit check” on you, your credit score loses a few points. With a pre-approval, often, only a “soft” check is necessary. Want to be sure? Call the lender to make sure they’re not doing a hard check.

Improved credit score

With more credit, you can decrease your credit utilization ratio. This ratio is a calculation indicating how much of your available credit you’re actually using. If you regularly use a large percentage of your credit, you have a high utilization ratio. A low utilization ratio is better for your credit score.

For example: If your credit limit is $2000 and every month you spend $1900 on your credit card, that’s a high utilization ratio ($1900/$2000 = 95%). But if your credit limit goes up to $6000 and you still only use $1900, your ratio is lower ($1900/$6000 = 32%).

In the world of finances, creditors use your debt utilization ratio as an indicator of how well you can manage the amount of debt you have and whether you can handle taking on more or not. It’s best to use no more than 35% of your credit at any one time. That’s the threshold most creditors use as a guideline for someone that is managing their debt well.

If you accept a pre-approved credit card increase, you can decrease your credit utilization ratio. Making you more appealing to creditors. That’s how a higher credit limit can improve your credit score.

More rewards points

It’s fun to earn points on a credit card. The more you spend on the card, the more points you get! Just remember that points aren’t worth much if you’re stressing about debt. In other words, access to extra reward points is great but isn’t a solid reason to accept a credit increase.

Cons: Reasons not to accept a credit increase

Doesn’t everyone want more credit? Actually, no. Having more credit has its drawbacks:

Potentially more debt

With more credit available, it’s easier to spend more. Ask yourself: Do I have the willpower to not spend too much? Will I have the money to pay the bill in full? If I can only afford the minimum payment, is this item worth going further into debt?

Let’s face it: credit card companies make money from people’s debt. The bigger the debt, the higher the interest. Interest goes straight to the credit card company. That being the case, they’re not opposed to trying to entice you to spend more. Even if it’s not necessarily in your best interest.

Harder to get other loans

If you apply for a mortgage, car loan, or other financings in future, the lender will look at your credit report. Carrying a lot of debt means a lower credit score, which might mean you won’t qualify for the loan.

Not great for your credit mix

Is all of your debt in credit cards? A mix of credit types is better for your credit score. If you want access to more credit, instead of increasing your credit card limit, consider improving your credit mix by applying for a personal loan or line of credit. Even if you don’t use it, you’ll have a better credit mix.

A false sense of security

Sure, it’s nice to know that money is available in case you really need it. Credit only gives you borrowed money though. Borrowed money equals debt. Having too much debt is the opposite of security.

Who should accept a pre-approved credit card increase?

For some people, a credit card increase will make life easier. For others, it could spell debt trouble.

Consider saying YES to a credit card increase if…

  • You have strong willpower. You can resist spending more than you can afford.
  • You’re organized and always pay your bills on time.
  • You can afford to pay off your full credit card bill every month.
  • You don’t have a lot of other debt.
  • You won’t be applying for any big financing (mortgage, car loan, etc.).

Consider saying NO to a credit card increase if…

  • There’s a very good chance you will max it out every month.
  • You can’t afford to pay off a big bill.
  • You often forget to pay your bills on time.
  • You already owe money on other cards or loans.

Bottom line

If you receive an offer for a pre-approved credit card increase, you don’t need to accept it. If you do accept the offer, make sure it’s good for you. Go for it, if you feel you can handle it.

Not comfortable with having additional credit? Simply decline the offer. Your financial health is in your own hands.

Still not sure? If you’d like a second opinion, we can help. Our trained Credit Counsellors can go over your finances and give you sound advice on the best way forward.

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