Let's go over why someone would bother trying to increase their credit limit? short answer, in almost all cases, a high credit limit has a positive impact on your credit score .
What is Credit Utilization
Credit utilization is a calculation based on the total credit you have available to you vs. the amount of credit you use. So if you have two credit cards, the limit on credit card 1 is £100 and credit card 2 is £100. This means the total credit you have available to you is £200.
Within your billing period, you spend £100 on Credit card 1 and £0 on credit card 2. Your credit utilization percentage would be 50%. Since £100 is 50% of £200. Having a credit utilization of 50% and above, will have a negative impact on your credit score.
For your utilization to have a positive impact on your credit score, the general advice is to aim for a utilization percentage of no more than 30%.
If we take the same example of two credits cards, credit 1 now has a limit of £500 and credit card 2 has a limit of £500, you now have a total credit limit of £1,000. As before, within your billing or statement period you spend £100. By increasing your available credit limit to £1,000 your utilization will drop to 10%. This keeps you below the 30% credit utilization limit and over time, this will result in an increased credit score.
Maximize your spending rewards
The one other major reason you might want to increase your credit limit is if you’re planning on collecting air miles, hotel loyalty points or earning cash back via credit card spending.
The idea is to put as much as you can, if not all of your normal spending and bills onto your credit card, this will allow you to collect the most amount of air miles and loyalty points. Learn how I was able to save on flight tickets here.
Having a low credit limit of £500 is going to make it difficult and a little awkward if you aiming for reward credit card sign up bonuses which will often require a minimum spend of £1,000 or more.
*****Notice I did not mention anything about increasing your limit so that you can buy a new flat screen TV or take yourself on a holiday****