Should You Increase The Credit Limit On Your Credit Card?

You walked into a fancy restaurant and had a scrumptious meal. But when it was time to leave, your credit card was embarrassingly declined.

Then, you remembered the amount you have charged to your card the past few months. You realised that you have maxed out your card.

We hope this awkward scenario was never experienced by you.

The credit limit is the ceiling amount that you can charge to your credit card. And most people have mixed feelings about their credit limit. Most revolving accounts have a credit limit, such as credit cards or overdrafts.

Why is credit limit important?

Some would worry about their credit limit being too high because they are afraid that their debts would spiral out of control. There are others who take the YOLO road. They want a higher credit limit so they won’t risk maxing out their card (and worry about clearing the outstanding balance another day).

Though the above are two valid concerns, there is one even more important reason why you should pay attention to it. Your credit limit can affect your credit health and credit score.

A percentage of your credit score is determined by credit utilisation, which is how much credit you’re using. Here’s how credit utilisation rate is calculated:

Total credit limit	RM12,000
Total balance	RM5,000
Credit utilisation rate	RM5,000/RM12,000 = 42%

The higher the rate is, the less creditworthy you are.

Most lenders in Malaysia consider credit utilisation rate as one of the most important factors to assess your creditworthiness. In fact, 30% of your credit score is made up of amounts owed, or credit utilisation.

When should you increase your credit limit?

If you don’t have a good grasp of your finances and debts, raising your credit limit is probably the worst idea you could come up with. Furthermore, if your finance is in disarray, your request to increase your limit would likely be declined.

However, there are a few reasons that warrant raising your credit limit:

• To improve your buying power
  Perhaps you need access to more credit now that you have more financial commitments. It’s not wrong to want to increase your credit limit, especially when it coincides with a major financial milestone, such as getting married or having a baby. The key here is to ensure you are able to manage your credit well so you do not fall into debts.

• To improve your credit score
  By increasing your credit limit, you will be lowering your credit utilisation ratio, provided that your expenses remain the same. For example, if you consistently have a balance of RM5,000 on your card, your credit utilisation ratio for a limit of RM12,000 is 42%, while a limit of RM17,000 is only 29%.

However, if you are already knee-deep in debts, then increasing your credit limit is not the solution. You will only incur more debts, which will make it more difficult to clear.

If you’re desperate for an increase, you are probably not in the right place financially to ask for it, and will probably not get the approval from the bank.

How to request for a credit limit increase

The truth is, you don’t get to determine the height of your credit ceiling. Your credit limit is determined by the banks based on your creditworthiness. When asking for an increase, keep in mind these factors:

• Provide proof of income increase. If you have had a pay raise, you can submit a credit limit increase form together with one to three months latest pay slips, latest EA Form, income tax form or LHDN receipt, or even your latest Employees Provident Fund (EPF) statement. You can submit these documents via email, post or manually submit it to a bank branch. The process will take three working days.
• Temporary increase only for urgent reasons. However, if you would like to request a temporary credit limit increase to purchase a brand new couch for your new home, you will be disappointed. Most banks may allow a temporary credit limit increase for urgent hospital or overseas transactions.
• Processing time delay. It may also take several days to approve, hence cardholders will need to request for the increase in advance. In your request, which can be done via phone, should include the merchant or country where the transaction will take place.

When is the right time to ask for a credit limit increase?

While there is nothing much you can do if the bank decides not to give you a credit increase, there are some factors that will increase your likelihood of getting your request approved.

Here is what you can do to better your chances:

• Be a good paymaster
  If your card payments have been sporadic at best, the chances of you getting a credit increase would likely be zero. If you are planning to request for an increase, be consistent. Ensure prompt payments for at least six to 12 months before submitting your application for an increase.

• Apply when you have a pay raise
  As most banks require some form of proof of your salary, it makes sense to apply after you’ve gotten a raise. This will definitely make your case stronger.

• Have a healthy debt-to-income ratio
  However, higher pay does not guarantee a higher credit limit. Having a high income with a lot of debt does not make you creditworthy to the banks because you may not be able to pay off a maxed-out credit card.

• Keep a good credit health
  When it comes to anything that a bank approves, it all goes back to your credit report. This means your bank will not just be looking at your credit card repayment. They will check all your other existing accounts, such as personal loan, hire purchase loan or even home loan. Having a clean credit report will definitely increase your chance of getting an approval from the bank.

It all lies in the timing. Although you may not be desperate for a credit increase, being rejected by the banks can have an impact on you. Every time a financial institution does a hard pull of your credit report can hurt your credit, especially if you have a short credit history.

Higher credit limit comes with bigger responsibility

As with any credit decisions, we urge you to consider all factors carefully. If you have gotten your increase request approved, you will need to continue with your good track record.

Use your credit card wisely, and make payments promptly and if possible more than your minimum payment to save on interest. Most importantly, keep your credit utilisation to less than 30% for a healthy credit score.

This article was first published in April 2017 and has been updated for freshness, accuracy and comprehensiveness.