New credit card or request limit increase to improve credit score?

[frizzyfrisbee]

Hello and greetings expert Mustachians! I have a question that perhaps some of you can answer or offer thoughts on: Should I open a new credit card or request a limit increase on my current (and only) card to improve my credit score in the long run?

My situation: I'm a undergrad student, 22 years old. I'll be graduating in January, and already have a couple potential job offers in IT (entry level helpdesk, gotta pay my dues) when I do graduate. I have a stable living situation, am in control of my finances (though my student loans are looming on the horizon..), and not looking to make any big purchases in the next 5-10, e.g. car, house, etc.

I opened my first credit card about a year ago (August 2012). At the time, I applied for two cards and received one. There were one or two other inquiries prior to opening my card because I was looking for a place to rent last summer. But since August of last year, I haven't opened any other credit cards or had any other hard inquiries on my credit.  Before that, the only lines of credit I had open were my student loans.  Anyway, my TransUnion credit score is now 713 (according to Credit Karma, which is an awesome site btw).

I've always paid off my credit card in full every month (I usually make payments every two weeks actually) and have never paid interest, missed a payment or incurred any fees. It has a limit of $800 and my credit utilization is about 10-15%.

I'd like to improve my credit score. Since I've had my card open for about a year, I figured now was a good time to either request a limit increase or open a new card. My question is, which will be better in the long run? I'm not requesting a credit limit increase because I plan on spending more, I just want to improve my credit score through either decreasing my credit utilization or opening a new card. I'm wondering if you all have any advice on which would be better. Would a new credit card count as a new source of credit or would it basically be the same as requesting a limit increase? Are there long run ramifications of either that I would need to deal with in the future?

One of the weakest points of my credit report is my low sources of credit (all I have are student loans and my one credit card), so I'd like to improve that if possible.

Any help, advice or thoughts on the matter would be greatly appreciated. Thanks :)

[ShavinItForLater]

Yes and yes.  Why not do both?

Either one may temporarily lower your credit score because of the hard pull on your credit file.  Longer term, either one will help your credit utilization portion of your score.

Of course one could channel Dave Ramsey and argue that you should do neither, pay for everything with cash and avoid credit completely.  Along those lines of thinking, there are always risks you'll miss a bill and get whacked with fees and interest, that you'll get overextended, and all manner of evils.

Assuming you don't roll that way, either one in the long run will raise your score and thus the suggestion to do both.  Personally, I have more credit cards than I can fit in my wallet, and I believe the credit limits per card are in at least one case over $35,000.

[Jamesqf]

Don't know about the credit score thing (I've never bothered to check, but the credit card companies keep sending me offers), but these days you can find quite a few rewards-type cards that will give you like a $100 for signing up (and spending some minimum amount in the first few month). 1-5% on various purchases, and zero interest for a year or more.

Now this does suppose that you know you have the self-discipline not to over-spend just because the credit's available, but used properly it's a nice little bonus.  As for instance, I knew I had some big expenses coming up this month (tuition for a class plus a couple of new tires), so signing up for a new card and putting those purchases on it got me about $140 back...

[lackofstache]

If you're comfortable w/ not actually running up the cards, I'd say do both. Get a bump up on the current card and try to find another card to use. I have several, only use one & pay it off monthly. This allows me to keep my credit limit high while not having to keep track of too much.

[dragoncar]

I'd do the new card first.  It will increase your overall limit the same as an increase on the first card, but also total accounts which is good for your score.  It will reduce the average age of accounts but that's not that bad this early.  I believe the "cost" will be the same (1 hard pull) unless you can get an increase in the first cars without a credit inquiry.

[madmax]

+1 new card. Also, in my experience American Express is quick to increase credit limits compared to my other cards (Chase and Wells Fargo). And they don't do hard pulls dinging your credit every time you request a credit increase. Chase and Wells Fargo both do hard pulls. So if you aim is to get the maximum credit limit, Amex is really good.

[Gen Y Finance Journey]

You don't mention what type of credit card you already have, but since it has an $800 limit, I'm going to assume it's a student credit card. It's possible that card may have a cap on how high the limit can go, so you should check on that. Opening a new card with a company that generally grants higher limits (like AmEx) will almost certainly do more to up your available credit. (But you can also request an increase on your current card as well.)

[frizzyfrisbee]

Wow, thanks for the awesome replies! Based off of what everyone has said, I'll apply for a new card first, since this seems to accomplish what a credit limit increase would do but with the added bonus of increasing my total number of accounts. After I get a new card, I'll request a credit limit increase and try to convince them to do it without a hard pull. If I can't get that to happen, I'll request the increase anyway since a temporarily lower credit score (with 2 recent hard pulls) won't be affecting anything in the near future. But I'm assuming that putting my best foot forward with a new company (i.e. applying for a new card first) would increase my chances of getting that card, rather than them seeing a recent hard pull from my current card if I requested an increase first.

Now on to researching credit cards...

Of course one could channel Dave Ramsey and argue that you should do neither, pay for everything with cash and avoid credit completely.  Along those lines of thinking, there are always risks you'll miss a bill and get whacked with fees and interest, that you'll get overextended, and all manner of evils.

Assuming you don't roll that way, either one in the long run will raise your score and thus the suggestion to do both.  Personally, I have more credit cards than I can fit in my wallet, and I believe the credit limits per card are in at least one case over $35,000.

It's a great point, although I think I've chosen the way of plastic for now. Like I mentioned, I rarely use my current card, and I'm going to just leave the new card buried in a drawer somewhere. However, I'd be curious how Ramsey's argument stacks up against proponents of plastic. Does he have a good primer article that outlines his basic argument for avoiding credit?

I'd do the new card first.  It will increase your overall limit the same as an increase on the first card, but also total accounts which is good for your score.  It will reduce the average age of accounts but that's not that bad this early.  I believe the "cost" will be the same (1 hard pull) unless you can get an increase in the first cars without a credit inquiry.

So a new card would increase # of total accounts! Good to know, I was very curious about this. I wasn't sure if credit scores lumped all credit cards together as a single source of credit or not.

You don't mention what type of credit card you already have, but since it has an $800 limit, I'm going to assume it's a student credit card. It's possible that card may have a cap on how high the limit can go, so you should check on that. Opening a new card with a company that generally grants higher limits (like AmEx) will almost certainly do more to up your available credit. (But you can also request an increase on your current card as well.)

(EDIT) I have a Fidelity Investments Rewards credit card [https://www.fidelity.com/cash-management/visa-signature-card], which is issued and administrated by FIA Card Services, which in turn is a subsidiary of BoA. It's not a student credit card, but I applied for it when I had a very low credit score (mostly due to lack of credit, not bad credit per se) so I'm not surprised they started me out with an $800 limit. It's one of the cards recommended by Ramit Sethi, who, I find, has some excellent practical advice, though I don't always agree with his life/financial philosophies, which is why I'm posting here :) But good advice, I will inquire to see if it has a hard cap on the limit.

[Gerard]

Another advantage of having (say) two $800-limit cards rather than one $1600 card is that if you hit a bad month and can't pay the CC bill in full, you can at least pay one off entirely (and thus incur no interest) and some of the other one, rather than finding yourself owing interest on the full amount back to your billing date just because you're $100 short of a full payoff.
Of course, if that happens, you then need to go into hair on fire mode and live on nothing for a month so that it doesn't happen again!

[ShavinItForLater]

Of course one could channel Dave Ramsey and argue that you should do neither, pay for everything with cash and avoid credit completely.  Along those lines of thinking, there are always risks you'll miss a bill and get whacked with fees and interest, that you'll get overextended, and all manner of evils.

Assuming you don't roll that way, either one in the long run will raise your score and thus the suggestion to do both.  Personally, I have more credit cards than I can fit in my wallet, and I believe the credit limits per card are in at least one case over $35,000.

It's a great point, although I think I've chosen the way of plastic for now. Like I mentioned, I rarely use my current card, and I'm going to just leave the new card buried in a drawer somewhere. However, I'd be curious how Ramsey's argument stacks up against proponents of plastic. Does he have a good primer article that outlines his basic argument for avoiding credit?

He has an entire series of books, podcasts, a website, even an iOS app with his advice.  Railing against the use of credit cards is as core to Dave's philosophy as biking is to MMM.  Here are a few articles:

http://www.daveramsey.com/article/the-truth-about-credit-card-debt/
http://www.daveramsey.com/article/build-credit-without-credit/lifeandmoney_creditcards/
http://www.daveramsey.com/article/5-reasons-why-debit-is-better-than-credit/lifeandmoney_creditcards/
http://www.daveramsey.com/article/credit-cards-make-you-fat/lifeandmoney_creditcards/

My assessment of Dave Ramsey is that he approaches personal finance from a behavioral standpoint.  Sure if you never miss a payment and rack up those rewards, anybody can show a good "ROI" on a spreadsheet.  But if personal finance was just math, everybody would be rich.  Reality is, shit happens in life.  People aren't as disciplined as they think they are.  They spend more than they planned to, partly because buying on credit is so easy.  Things go wrong, people lose their jobs, medical emergencies happen, businesses go south, people get divorced, and on and on.  This *happened* to Dave, he went from being a real estate millionaire "on paper" to going bankrupt.  His core philosophy is teaching people to get out of debt and build wealth without taking on the risk of things like credit cards, car loans, too-large mortgages, and other debt.  In his view, most personal finance "math" doesn't account for risk at all.

[frizzyfrisbee]

But if personal finance was just math, everybody would be rich.  Reality is, shit happens in life.  People aren't as disciplined as they think they are.  They spend more than they planned to, partly because buying on credit is so easy.  Things go wrong, people lose their jobs, medical emergencies happen, businesses go south, people get divorced, and on and on.

That's a solid argument. I may be good with my credit cards and spending right now, but I've never had any real financial crises either. And after a quiet moment of self-reflection and monthly statement checking, turns out I tend to use my credit card precisely when I probably shouldn't--on unbudgeted/wasteful spending. Just because I keep it in check and pay my bill off in full doesn't mean that it's completely problem free.

The "Credit Cards Make You Fat" article makes a good point about that I think. I actually recently switched over to the envelope system for my groceries, and I have not gone over budget once with it (kind of impossible when you leave your cards at home :P) and I spend a lot less on frivolous food.

It's funny, I applied for a student credit card today after reading through these posts and I got immediately turned down. I don't know why (they're going to send me their reasons later) but I was kinda pissed and irritable about it. After reading some of Ramsey's articles, maybe it was a blessing in disguise :) I did, however, get approved for a credit limit increase without a hard pull. Now whether that was good or bad, I guess we'll see, but I'll definitely be mulling over some more of Ramsey's articles and thinking more about whether or not I want to deal with the risks of credit cards. Building wealth without debt does sound very attractive to me, but I guess I've always just worked off the belief that you have to have credit in order to be able to do "important stuff." It wasn't totally an assumption on my part, as I've done a fair amount of research on the topic, but what I came across in my research probably suffered from some anti-debt-aversion bias.

Thanks for the thought-provoking and practical answers. This was my first post here at the MMM forums, and I'm really grateful for everyone who took the time to read my post and respond.

[edited for spelling]

[chicagomeg]

Chase Freedom and Citi Forward are two solid cards that are easy to qualify for. In general, don't waste your time on anything Visa Signature as it requires $5k min credit line to be approved.

[frizzyfrisbee]

Chase Freedom and Citi Forward are two solid cards that are easy to qualify for. In general, don't waste your time on anything Visa Signature as it requires $5k min credit line to be approved.

I did come across those two cards in my research. Besides the student credit card for which I applied (and was rejected), I also applied for the Discover It card (haven't heard back yet). I don't remember the specific reason I chose the Discover over the Chase Freedom or Citi Forward, but I know the Discover had no foreign transaction fee and no annual fee. My chances of getting approved for a Chase Freedom were a bit lower than the Discover, and since I already got rejected for a student card (even though I'm a student...) I figured I'd diversify a bit and try another option. Of course my rejection could have nothing to do with the whole student card factor, but I won't know for another few weeks.

I also use Credit Karma, and it was one of the cards recommended based on my profile. Of course their recommendation could be pure marketing, but it seemed like a solid choice based on other websites and their data for who's generally accepted for the card, the kind of credit history and score they have, etc.

[dragoncar]

Chase Freedom and Citi Forward are two solid cards that are easy to qualify for. In general, don't waste your time on anything Visa Signature as it requires $5k min credit line to be approved.

I did come across those two cards in my research. Besides the student credit card for which I applied (and was rejected), I also applied for the Discover It card (haven't heard back yet). I don't remember the specific reason I chose the Discover over the Chase Freedom or Citi Forward, but I know the Discover had no foreign transaction fee and no annual fee. My chances of getting approved for a Chase Freedom were a bit lower than the Discover, and since I already got rejected for a student card (even though I'm a student...) I figured I'd diversify a bit and try another option. Of course my rejection could have nothing to do with the whole student card factor, but I won't know for another few weeks.

I also use Credit Karma, and it was one of the cards recommended based on my profile. Of course their recommendation could be pure marketing, but it seemed like a solid choice based on other websites and their data for who's generally accepted for the card, the kind of credit history and score they have, etc.

I also have freedom, which is my preferred card.  If you belong to Costco consider their Costco Amex. 

Behaviorally, I agree - it sounds like you haven't had credit card "problems" in the past so I think you'd be fine.  I have like 6 cards but only carry one in my wallet and never max it.  So that's one way to behaviorally limit frivolous credit use.

But I generally assume people here are past the typical financial blog issues of "I can't handle having credit".  For anyone who has a bad relationship with credit, I'd follow the advice to cut up the cards