You may know that your credit card company can penalize you for late payment. But did you know that your issuer will also reward your responsible credit card behavior?
We’re not talking about earning bonus rewards or extra perks – instead, credit card issuers are rewarding cardholders for their on-time payments with a credit limit increase. This is often automatic and you may not be notified that it is happening. But it will improve your credit score as long as all other factors remain the same. This means you shouldn’t start spending more or change your payment habits.
Here’s everything you need to know about an automatic credit limit increase, plus some tips for when it’s time to upgrade to a better card.
What is a credit limit?
“A credit limit is the maximum amount a card issuer has lent to a cardholder once they have been approved for a credit card,” explains Nathan Grant, senior credit industry analyst at Credit Card Insider, a credit card review site. In other words, this is the maximum you can charge your card before you have to pay off the balance.
Your credit limit will have a significant effect on your credit score due to what is called your credit utilization rate. This is the percentage of your available credit that you are using at any given time and is calculated by dividing your total outstanding balance by your total credit limit. “Usually the higher the credit limit, the better your credit score,” says Jessica Weaver, CFP, CDFA, CFS and author of “Confessions of a Money Queen”. Indeed, if your credit limit increases and your balance remains the same, you will use a lower percentage of your available credit, which will have a positive impact on your credit score.
Why did your credit limit increase automatically?
If you find that you received a credit limit increase without asking for it, know that this is a common occurrence that will most likely help you, not hurt you.
“Sometimes issuers automatically give cardholders in good standing a higher credit limit,” says Grant. Weaver notes that credit card companies like to give credit limit increases to people who use their card frequently but also make their payments on time. There are several reasons your credit card issuer may have given you a raise:
- You have always made your payments on time
- You declared an increase in income
- You have been a cardholder for a long time
Each issuer has different criteria for determining when an automatic credit limit increase will occur. But if this happens to you, you should congratulate yourself for maintaining a positive payment history. With your new credit limit, you can enjoy more flexibility in spending with your credit card, and if you keep your balances at the same level as before, you’ll likely see your credit score go up as well.
Should you spend more?
Your credit limit tells you how much you can spend, not how much you should to pass. “Just because you have a higher credit limit doesn’t mean you have to spend more. You have more buying power, but that doesn’t mean you should rack up more debt,” says Grant. In fact, you should focus on keeping your balances low, ideally below 30% of your credit limit. However, Weaver adds, the higher credit limit “is there as a resource.” This means you can use it for an emergency expense or a one-time large purchase that you intend to pay off, instead of taking out a separate loan. However, having an emergency fund on hand or delaying a major purchase until you can pay for it in cash is always better than keeping a balance on your card in these situations.
In general, though, “you should be able to pay your credit card with the money in your bank account,” Weaver says. This means you should have a budget and never spend more than you can afford to repay during the grace period. If you start to have a balance, it will negatively affect your credit utilization rate, and high credit card APRs mean interest charges can add up quickly too.
Will your APR change?
Your APR represents the total annual cost, including interest and fees, that you will pay to carry a balance on your card. Many credit card issuers charge penalty APRs, so if you miss a payment, you could see your APR increase. But an automatic credit limit increase should have no effect on your APR. “Issuers won’t change your APR because of this factor,” says Grant, who notes that you’ll need to negotiate with your issuer separately if you want a lower rate.
Can you apply for a higher credit limit?
Even if your issuer doesn’t offer automatic credit limit increases, you may want to request a higher credit limit if you’ve been making payments on time for a while or if your income has increased. The process for applying for a higher credit limit varies by issuer. “Some cards will have a request link directly in your online account or in the app itself. Others might ask you to call customer service,” says Grant. get a higher limit, and if your credit card company approves the increase, you’ll likely see an increase in your credit score.
Pro tip
Some credit card issuers allow you to request a higher credit limit online. If you’ve been making regular, on-time payments for a while, or if you’ve seen an improvement in your credit score, try this option.
Are you ready for a map upgrade?
An automatic credit limit increase is a sign of a consistent payment history. If you’ve also kept your debt balance low in addition to making payments on time, you may have seen your credit score improve over time. This means you might be ready for a better credit card if you started with a student card or a card designed for bad credit applicants. Weaver recommends a credit score of 700 as a good benchmark to aim for before applying for a rewards card.
If your current credit card doesn’t fit your lifestyle, that’s another sign it’s time to apply for a new one. “If you start using your credit card more and more, you want to look at what the rewards are on the credit card,” says Weaver. Try to choose a rewards credit card that offers rewards for the categories in which you spend the most. Pay attention to other bonuses and perks too, and pick the card you’ll get the most out of. For example, if you are planning a trip abroad, you might want a travel rewards card with no foreign transaction fees.
There’s no magic moment to apply for a new card, but you can constantly monitor your credit score and view available credit card offers. If you see your score go over 700 and you find a card that offers more for your money, it’s probably a good idea to apply. Remember that even after getting a new card, you should probably keep your old card open to benefit from that account’s credit history, unless the card charges an annual fee that isn’t worth it anymore. sadness.
