When a college student wants a higher credit limit
08/02/2013 8:06 PM
08/02/2013 8:06 PM
My credit limit is too low.
That plea can send your sweat glands into overdrive if it’s coming from your college-age young adult, especially one who has a taste for beef tenderloin on his ramen noodles budget.
It’s common for many beginning card holders to start with low credit limits of $750 to $1,000 — that’s how it should be to tamp down the temptations to spend recklessly. Still, at those levels, it doesn’t take much for even the most responsible users of plastic to max out their monthly credit limit.
Start with an unexpected expense, like a $500 set of tires. Add a flight booked a few days later to attend a best friend’s wedding and, just like that, your card-carrying 21-year-old is bumping against her credit limit.
If you have a child in this boat, asking the bank to raise the credit bar is a reasonable solution. But like everything else involving relatively inexperienced credit card holders, caution is advised.
Here are a few questions to ponder: What’s the process for obtaining a higher credit limit? How much of a boost is reasonable for a young user? What bearing might a higher limit have on your child’s credit record? Remember if your young adult has his own plastic instead of being an authorized user on your account, your role might be to provide advice rather than make the call.
Until the financial crisis of a few years ago, card issuers routinely upgraded credit lines to existing customers mainly as a marketing tool. But that changed as consumers rang up enormous credit card debt that couldn’t be repaid and banks had to eat the losses.
Today, credit increases are not as automatic, especially for young adults in school, said Ben Woolsey, director of marketing and consumer research at CreditCards.com, a card comparison website. That means young card holders will need to be more proactive to get what they want.
Woolsey said it’s generally best to start with your current card issuer. It will know your bank account history and payment patterns. Expect the bank to run a credit check to determine whether there is much risk to extending the borrowing line on the plastic.
Policies vary from bank to bank, but it helps to have income from a full-time job, a track record of paying the balance in full each month and no outstanding debt on another credit card or on a car loan that could raise red flags about using debt too heavily.
Bill Hardekopf, publisher of the Lowcards.com website, advises going slow on bumping up a young adult’s credit limit — maybe going from $1,000 to a new limit of $2,500 to $5,000.
“It really depends on how financially responsible your child is,” said Hardekopf. “Ask, ‘Can you handle a higher limit?’”
If the answer is yes, a more substantial credit line should help the 20-something’s credit history. Credit scoring algorithms — what are termed debt utilization ratios — favor those who consistently tap less than a third of their total credit line, said Woolsey.
Finally, keep in mind that the bank isn’t raising the credit limit of a college student or recent graduate just out of the goodness of its heart. It is hoping the young customer will stick with the bank as he or she starts making money and needs to finance a car, a home and the other luxuries of life.