Ask Stacy: My Credit Limit is Frozen. What Now?

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Here’s a question from a reader about what to do when you’d like to raise your credit limit, but your bank won’t budge…

Hello,
I have a question for MTN.

I had a dark spot on my credit record from years ago. Since then I have been using my credit wisely and trying to repair the damage, which seems to be working.

As part of the process, I got a credit card from Orchard Bank, owned by HSBC, which is now owned by Capital One. I was requesting and receiving regular credit limit increases, however I’ve been told there’s a freeze on increases: not my account specifically, but all Orchard Bank credit limit increases.

I did some research and found out Capital One is strange with limit increases, with customers having accounts for years and not being granted increases. I’d like to move away from them, but I’ve had the card for a little while, what are my options?

Thank you for taking the time to answer my question!
-Seth

Here’s your answer, Seth – I’ve expanded it to include general advice on improving your credit and shopping for credit…

Credit card company not cooperating? No problem.

If Seth wants more credit than Orchard Bank is willing to provide, the answer is simple. He should keep that card and get another one. There’s no shortage out there: Go to our Credit Card page and you’ll find dozens of cards competing for your business.

We also have articles that will help you decide which card to get, including What’s the Best Reward Card If You Don’t Carry a Balance? and if you’re carry a balance, 5 Credit Cards With Low Interest Rates.

With his improved credit, Seth can probably get another credit card without much hassle. However, since a long credit history is better than a short one, he shouldn’t cancel his existing card.

Why does Seth want to raise his credit limit?

I hope Seth isn’t trying to raise his credit limit because he’s spending more than he’s making. He should be paying his balance in full monthly, not using his plastic to borrow. Paying interest isn’t the best way to improve a credit score – paying bills on time, every time for long periods of time is.

But Seth might be trying to raise his credit limit to help his utilization ratio: the amount of credit used vs. the amount available. For example, if Seth has a $1,000 credit limit and uses $300 of it, he’s got a utilization ratio of 30 percent – the upper limit recommended by some to keep your credit score as high as possible.

There are two ways to lower a utilization ratio – pay down the balance, or raise the limit. If Seth is attempting to lower his utilization ratio by raising his limit, I’d rather he pay down his balance instead.

What affects your credit score?

Here are the key ingredients of your credit score, according to Fair Isaac, creator of the FICO score:

  • Payment history (35%) – Your track record of paying back what you borrowed. Accounts in collection, late payments, and bankruptcy are bad; paying on time for a long period is good.
  • Amounts owed (30%) – As explained above, this includes the amount of credit you use vs. the amount you have. Maxing out your credit hurts it; keeping a lot of unused credit available helps it. While raising your credit limits can help your score, adding too much credit relative to your income can hurt it.
  • Length of credit history (15%) – The amount of time each credit account has been open. The longer your history, the better. This is why it’s typically best to keep older accounts.
  • New credit (10%) – This includes recent inquiries and requests for credit. While applying for a new card or two won’t hurt, regularly applying for new credit cards or other loans will cost you.
  • Types of credit used (10%) – There’s all kinds of credit out there, from revolving (credit cards) to installment (car and home loans.) Fair Isaac likes you to be well-rounded and sample them all. In short, diversity helps.

Want to raise your score? Get another type of loan

Credit cards are an example of revolving credit. If that’s the only type of credit reflected in Seth’s history, he might consider taking out an installment loan, like a car loan. That will positively influence his “Types of Credit Used.”

On the other hand, he’ll also be paying interest, which may help his credit score, but will cost him money. If he needs a car and has to borrow to buy one, fine. But I wouldn’t recommend paying interest just to increase a credit score.

The bottom line

In recent years, financial writers – myself included – have published tons of credit score tweaks and hacks. That’s OK: Credit scores are important, especially when you’re about to borrow big for mortgages and such. But let’s not lose sight of the big picture. Great credit scores aren’t the result of hacks, they’re the result of a long history of on-time payments.

If Orchard Bank gives Seth the cold shoulder, he should move on. But higher credit limits are a double-edged sword. While they may tweak your score in the right direction, they also cause you a world of hurt.

Tread carefully, Seth.

Got a money-related question you’d like answered?

Drop me a line, or reach out on our Facebook page. Just try to make sure your question will be of interest to other readers – in other words, don’t ask for super-personal or super-specific advice. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

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