Avoid the Christmas Credit Crunch: Up Your Limit

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You have your sights set on a 50-inch flat-panel TV for your folks this holiday season. The problem is, even deeply discounted at a thousand bucks, it’s still more than you can afford before payday. The solution? You could wait two weeks for your next paycheck to clear and hope the TV is still in stock, or you could ask your bank for a credit increase and put it on your card.

With the country in a recession and companies trying to bounce back from huge losses, banks are much more cautious about who they’re lending to these days. There just isn’t a whole lot of money to lend. But for those with good credit and a solid payment history, asking for a credit limit increase could be a good way to give you some extra holiday spending power and boost your credit score.

Know Your Credit History
Before even asking, make sure it’s been at least six months since you last made a request on your available credit. Whether you recently asked for an increase or you’ve applied for a department store credit card, it’s all treated as a hard inquiry on your credit report. And doing it too often can be hazardous to your score.

Next, make sure you’re familiar with your credit score. In particular, take a look at your debt-to-credit ratio, or how much of your total available credit you’ve used up. Experts generally suggest keeping it below 30 percent. “The more you use up your credit, the more chance you have on defaulting on the money you owe,” explains Carol Kaplan of the American Bankers Association. “It’s seen as a sign that you’re running into trouble if you start maxing out your cards.”

Strategize Your Line of Credit Request
Armed with the information on your credit score, you can now proceed with the request. Call the customer service number provided on your card and ask for a “credit limit increase.” Financial author Curtis Arnold says it’s okay to ask for a specific number and it doesn’t hurt to seek a little higher. “It’s beneficial from a credit standpoint to get the line of credit as high as you can go,” says Arnold, author of How You Can Profit from Credit Cards and founder of CardRatings.com. “If you ask for $500 but they’re willing to give you $2000, you’re missing out on a chance to build your credit score,” he says.

“A higher limit can be beneficial to your credit score as long as your balance does not increase along with the higher limit,” seconds Ethan Ewing, president of Bills.com.

Be Cautious of Overspending

There are of course, some consequences to be aware of. “If it’s a temptation for you to rack up your purchases then I would limit the amount you ask for,” says Arnold. “The closer you are to maxing out your limit, the closer you are to tanking your score.”

Adds Ewing: “Asking for an increased credit limit can lead to the temptation to purchase outside one’s means. Particularly in today’s economy, that can be a dangerous move. Bottom line: Don’t spend more than you have.”

Be Prepared for Rejection
Investment group Oppenheimer (OPY) recently predicted the U.S. credit-card industry could cut more than $2 trillion of lines over the next 18 months, in an effort to ride an expected wave of consumer defaults. Analysts have also said banks are likely to raise interest rates and – in some cases – completely close customer accounts. The bottom line: “It’s not going to be as easy to get a credit boost as it was this time last year,” says Arnold, “so consider whether you really need it.”

It helps to have a solid game plan and a few alternatives. If it’s a big-ticket item you’re looking to put on your card, consider how long you’ll need to pay it off. Take into account the interest rate and any fees the bank may charge. And consider this: paying less then full amounts each month begins a cycle of fees that is difficult to halt. In the end, the “great deal” that you put on your credit card could end up costing significantly more than its purchase price.

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