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These are quite common; however, it is often difficult to know what to do when receiving them. On the other hand, if you don’t receive pre-approval and you need to borrow money, how do you apply for one? What bank, credit union, or lender should you apply with? Can you shop around?
What is a pre-approved credit limit increase?
This happens every so often when lenders go through their client bases and see who would potentially qualify for an increased credit limit. In order to send you a pre-approved offer, they will run a soft credit check and then verify your payment history. If they can verify that you have a credit score that meets their standards as well as is on top of your current balance and payments, then they will send you a notice of pre-approval. This is not guaranteed approval. You still must go through the process's second half to complete the increase.
Does a pre-approval affect your credit score?
No, in order to give you a pre-approval, companies run a soft credit check. This has no impact on your credit score. A soft pull gives them a ballpark estimate of your credit score in order to see if you would qualify for a pre-approval. Once you have accepted the increase, a hard credit check is done to verify the approval. The hard credit check does affect your credit score from anywhere between 5 and 15 points. However, if you have gotten the pre-approval with a bank or lender that has done a hard credit check within the last year, they will not need to do another one for final approval.
Should you get a credit card credit limit increase?
When a credit card company offers you an increase in your credit limits, it is ultimately up to you if you want to take on more credit. While accepting that offer does increase your credit limit and lower your credit utilization by not going over 35% of your available credit, it does also allow you to increase your overall credit card debt. Unless you have good control over your spending habits, it probably isn’t a great idea.
Should you accept a pre-approved line of credit?
Whether or not you accept this offer ultimately depends on your financial situation. While the lender has done a soft check and verified that you fall within the limits to apply for a pre-approval, it doesn't mean you can reasonably afford it. Their deciding factors don’t include some of your everyday expenses. Even though they have come to the conclusion that you can most likely afford the payments, that doesn’t mean that you can. When they do their calculations, they are only looking at if you can afford the monthly payments. Not large lump payments. Because it is only a pre-approval, you are allowed to say no or go with a lower amount. A different bank or lender may have a different rate and amount that works better for you.
Pre-approved line of credits from major banks
If you have a bank account with an institution, it is likely at some point that you will receive preapproval for a line of credit whether you apply for it or not. They usually entail an amount as well as an interest rate but, depending on the institution, they will look different.
Scotiabank
With Scotiabank, their personal lines of credit range from $5,000 to $75,000 and have no annual fee. The interest rate you get would be based on your credit history. They advertise that they offer flexible payment options that can be as low as interest only. Whether they offer you a line of credit or you apply, the pre-approval is just an idea of what you could be approved for.
If you aren’t already a customer or need to apply for a pre-approval, there are some documents you need to supply in order to apply:
- Valid government ID: Passport, driver’s license, government-issued ID card
- Proof of employment: Pay Stubs and employment letter
- Proof of self-employment if you are self-employed: NOA or T1 general
TD
As long as you are a TD customer, you can log into your EasyWeb account and see any pre-approvals or apply for one. They offer personal lines of credit ranging from $5,000 to $50,000. They specify that you are only required to make interest-only minimum payments and the rest is up to you.
Most banks specify that their lines of credit have variable interest rates, but TD offers 2 different interest rate options:
- Competitive variable rate
- Fixed-rate advantage option
While they do offer the traditional option of making just interest rate payments, they also offer the option of fixed payments with a locked interest rate. Once the term is done, the remaining balance returns to your revolving balance.
RBC
The Royal Bank of Canada has it on their website that you can calculate your estimated payments on a personal line of credit approval to see if the payments will work for you. Their lines of credit start at $5,000 but don’t seem to have a cap. Not only do they advertise their unsecured lines of credit for pre-approval, but they also advertise secured lines of credit, also known as home equity lines of credit. Their pre-approvals only go up to 65% of the value of your home instead of 80%. All interest rates are based on the prime rate and are variable.
BMO
As a BMO customer, it’s pretty easy to go online and apply for a line of credit. This is usually where you will see any limit pre approvals as well. They start at just $2,000, and then go up based on your approval amount. Their monthly payments are low as well at just 2% of your balance with a minimum payment amount of $50.
When should you get a line of credit?
Often, people turn to an unsecured loan or an unsecured loan as a form of new credit, not realizing they are able to get a line of credit. While it is similar to an unsecured loan, a line of credit is flexible. Similar to a credit card, you can pay off a line of credit and then use it again. Keep in mind that, just like a loan, you can get a secured or unsecured line of credit.
Unsecured LOC
The reason many banks will recommend an unsecured line of credit is that it can continue being used. This avoids taking out multiple personal loans. They are more intended to be used for purposes like house repairs, things that need large cash deposits, or by small businesses. Some people also secure a line of credit to have as an emergency fund, this is especially common when first purchasing a home. Sometimes lenders will add one when you get a mortgage, so they know you have access to funds if you need it. While you pay the interest monthly on a line of credit, the payments can be made at your discretion and go directly towards the principal.
Secured LOC
A secured line of credit usually comes in the form of a HELOC (home equity line of credit). This is an option if you own your own home. What the lender does is take the value of your home and minus what you still owe on your mortgage, 80% of the number left is the maximum you could be approved to borrow. While HELOCs have lower interest rates because collateral is involved, they are much riskier. When taking out a HELOC it is important to at least make the minimum payment every month to avoid losing your home. The main reason you would take out a HELOC is to cover the cost of renovation since you are using the equity of your home to increase its value.
What does it mean when you get pre-approval for a line of credit?
When you get pre-approval for a line of credit, it means that the bank has assessed the risk and deemed that you can afford a line of credit. Often, they put these offers out to entice you to take out a personal line of credit, which can then result in unexpected debt. It can also deter you from applying for a personal loan.
It is important to remember that line of credits can range anywhere from $1K -$75K and, just because you are preapproved for a certain amount does not mean that you have to take it. For example, say the bank contacts you and pre-approves you for $20K, but if you find that you do need a loan, but you only need $1k, you could take a loan of only $5K. Depending on if you have any other revolving credit, this would leave your credit utilization at 25%, which is under the recommended 35%. The offer that they send you is usually the maximum amount that they will give you and is often negotiable.
How A Line of Credit Affects Your Credit Score
A line of credit can either be positive or negative to your credit score. Since it’s a form of revolving credit what matters is how much of your credit is used. If 30% or less of your total credit limit is used, then you’re likely to have an increase in your credit score. The more space that you use of your credit limit, the more negative an effect there will be on your credit score, unlike a loan that has a positive impact as long as you make all of your payments on time.
Is it good to accept a pre-approved line of credit?
Whether it is good or not to accept a pre-approved line of credit is based on 3 things:
- Does it make sense financially to take out the line of credit? Do you need it? Are you financially responsible enough to take it on?
- Will it help your credit score? Just because you accept a line of credit doesn’t mean that you have to use it. By accepting the line of credit, you are changing the percentage of your credit utilization and adding another positive tradeline to your report, if you are looking to increase your credit quickly then this is a good idea. Remember, to keep the spending low and make monthly payments if you want it to have the desired effect.
- Is it the best interest rate you can get? Just because you are pre-approved for a line of credit doesn’t mean it is the best offer out there. There may be a different lender that has a better offer out there for you.
Are there any downsides to opening a line of credit?
While lines of credit can be extremely beneficial, there are also some downsides to them.
- The bank can use them to withdraw any payments you are late on, and they can also withdraw any payments for your LOC out of your chequing account.
- They have a variable interest rate. Because of this you never know how much interest you will actually be paying on what you owe.
- A secured line of credit affects your home. If you default on the payments the bank can seize your home as collateral.
- Sometimes, they can be rebranded as a second mortgage. This also puts your house up as collateral.
When taking out a line of credit, it is important to be sure that you can afford it. Just because they do not need to be paid back immediately doesn’t mean that you need to keep them racked up.
What does it mean to be pre-approved for a credit limit increase?
When a lender pre-approves you for a credit limit increase, they are essentially rewarding the fact that you are financially responsible and can make your payments on time. This, however, is only a pre-approval. They are just making it known that you are able to apply for what they are offering with the likelihood of being approved. It is not necessary to accept the offer. It is just a way for the lender to make more money on interest by lending you more money.
Does a pre-approved credit increase affect your credit score at all?
A pre-approved credit increase will affect your credit once it is activated. How it affects your credit depends on your current credit score as well as the active tradelines you currently have on your credit report. It will affect your credit utilization ratio as well as your debt-to-income ratio. Both things affect your credit score. As long as you spend less than 35% of the allotted limit, it should increase your credit score which will negate the small hit your score would have taken from the hard credit check. This will be conducted on the final approval.
Is it good to accept a credit limit increase?
Just like with a line of credit limit increase, accepting a credit card limit increase can positively affect your credit score as long as it is used correctly. In general, the higher credit limit you have available to you will keep low credit card balances, and will give you a higher credit rating.
It is important to keep in mind the rates that the lender is offering before you accept though. Each lender will have different rates and conditions associated with their credit card.
TD
If you have a TD account and are registered for EasyWeb, that’s where your pre-approved credit limit offers will be. Once you are logged in, go to your credit card account activity page and click on the credit limit increase offer. It will be just below your current credit limit. You can then click on the offer and follow the steps to activate it, or you can contact TD to discuss the limit and if you’d like a different amount.
CIBC
When receiving a credit limit increase from CIBC, it isn’t as simple as TD and accepting the offer online. Often, they request that you call in or go to the bank to finalize the approval. Making it a little more difficult to accept a credit increase, it also allows you to think a bit before accepting any offers.
Scotiabank
If Scotiabank offers you a credit limit increase, it will be found in your online banking as soon as you log in. There will be an increase listed for you under offers. Once you click on this offer you can either accept or decline it. Even if you need to apply for pre-approval, you do it from the same page. You do not have to call in or go into the bank.
BMO
Just like Scotiabank, the Bank of Montreal offers credit limit increases on its website. When you go into the website to manage your credit card you will be able to accept or decline the pre-approved credit limit increase. This is the same place you can also apply for one.
PC Financial
PC Financial will send you an email making you aware of the credit limit increase offer, as well as having the offer as a pop-up when you log in to your credit card management page. From there you can either accept or decline the offer. This is also the same place where you can message an agent to request a limit increase or fill out the application for the limit increase.
RBC
Whether you are applying for a credit limit increase or receiving an offer, just like most other banks, you can find all of this information on your online banking page. When you select your credit card you will see any limit increase offers as well as a place to request a credit limit increase.
Triangle Mastercard
Triangle Mastercard does require you to call in to request a credit limit increase. That being said, if they do offer you a pre-approved credit limit increase, they will show this offer under your online banking. From here you are able to accept or decline the offer.
What if a credit limit increase isn’t for me?
While for some, a credit increase is super helpful to them, and they can manage it properly. If you struggle with managing revolving debt and need a certain amount of money, getting a line of credit or credit card increase may not be the way to go. You may be better off obtaining a personal loan. A personal loan won’t affect your credit utilization as it is a form of installment, it is also one of the most powerful ways to increase your credit bureau score. While the interest may be slightly higher, you have more limitations on the money which, for some, is extremely helpful.
At Spring Financial, we specialize in personal loans ranging from $500 to $35,000. Not only do we help you obtain a personal loan, but we also offer great rates and work with people with all different credit scores. In as little as 3 minutes you can apply online or give us a call at 1-888-781-8439.
