Is It Good to Have High Credit Card Limits When Applying for a Mortgage?
When you apply for a mortgage, your credit report is one of the most important documents you will give the lender. Most require borrowers to have at least a minimum credit score before they will approve a mortgage. Many aspects of your credit report contribute to your score, including your credit card limits.
Credit Card Balances
High credit limits won't hurt your credit score, but they won't help it on their own, either. Your "credit utilization" rate, which is the ratio of your outstanding balance to your limit, is what actually affects your score, so the relationship between your credit card limits and balances is really what matters to lenders. For example, a card with a balance of $250 and a limit of $500 will have the same credit-use rate as one with a balance of $2,500 and a limit of $5,000.
Rate of Use
The limit you have on each credit card helps determine its credit-use rate and your overall level of credit usage. To calculate the rate on an individual credit card, divide your balance by your credit limit. To figure your overall credit use, divide the sum of your outstanding balances by the sum of all your credit card limits.
Boosting Your Score
It is possible to improve your credit score by raising your card limits and keeping your balances the same. For example, if you have a credit card with a $100 balance and a $500 limit, your usage rate for that card is 20 percent. According to Bankrate.com, financial experts recommend keeping a rate of no more than 10 percent for credit purposes, so 20 percent is too high. However, if the card company agrees to increase your limit to $1,000, your usage rate will fall to 10 percent, as long as you don't add to the card's balance.
Not all credit card companies will agree to increase your limits, especially if you have made late payments in the past. While boosting your limits may help lower a high credit-use rate, it won't eliminate any of the debt you already owe. The higher limit may actually tempt you to rack up even more. A safer way to lower your usage rate is to pay down your debts.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.