Life is full of surprises, some good and some bad. Waking up one day with a credit limit increase that you haven’t asked for can be a good surprise or a bad surprise depending on how you view it.
Let’s take a look at why credit card issuers are increasing credit limits without the intervention of the cardholder, and what the fallout (good and bad) of an increase can be.
What is a credit limit increase?
Your credit limit is the total amount you are allowed to charge to your credit card at one time. A credit limit includes all new purchases, old purchases that haven’t been paid for, and any balance transfers. Your annual fee is also charged against your credit limit.
For example, if you have a credit limit of $ 10,000, that means you can have a balance of up to $ 10,000 on your credit card. Once you reach $ 10,000, you will no longer be allowed to spend. Usually, if you try to incur charges that will cause you to exceed your credit limit, your transaction will be declined.
How is your credit limit determined?
Credit card issuers use two different methods to determine credit limits. Some credit cards come with a preset credit limit. The other option is for the lender to look at your credit rating and credit history to try to determine whether or not you are a responsible borrower and what kind of credit limit and interest rate you are eligible for. The stronger your credit history, the higher your limit is likely to be.
Why did my issuer increase my credit without asking?
Getting back to spontaneous credit limit increases, why are credit card issuers doing it without asking? If you pay your bill on time each month and have overall handled your credit card responsibly, there might come a time when your credit card company alerts you that your credit limit has been increased. In some cases, they may offer you a raise and give you the option to accept or decline it, but sometimes they do so without asking for your opinion.
One of the main reasons credit card issuers do this is to help build customer loyalty and encourage responsible borrowers to spend more on their credit cards each month.
But why did they choose you? It can happen because you are seen as a responsible customer. It can also happen if you report an increase in income. In some cases, credit card issuers have a built-in path for customers that ultimately leads to a higher credit limit after being a customer for a while.
If you want to know why your credit limit increased, don’t be afraid to ask why it happened so you can better understand how it could happen again in the future.
Benefits of increasing the credit card limit
It can be surprising when your credit limit is increased without you asking. On the bright side, there are a lot of benefits that come with increasing your credit limit that can end up working in your favor.
Better use of credit
One of the most important factors in determining your credit score is your credit utilization rate. Your credit utilization rate represents the amount of credit you have compared to the amount you use.
This ratio represents 30% of your score and the lower the ratio, the better. When your credit limit is increased, your credit utilization rate decreases by default. Just be careful not to spend a storm or your ratio will increase again.
More purchasing power
If you have big purchases on the horizon and have a plan to pay for them, a higher credit limit can give you more buying power. The more you use your credit card, the more rewards you can earn. Just make sure you can afford to pay your bill on time before shopping so you can earn all the rewards without going into debt.
If you have credit card debt to pay off on other cards or are working to save, increasing your credit limit can create spending temptations that distract you from your goals. Keep an eye on your spending if you receive an automatic increase.
Better conditions in the future
Having a higher credit limit and a lower credit utilization rate can lead to a better credit score. The better your credit rating, the better the terms and interest rates you will qualify for in the future. Using a higher credit limit to boost your score can pay off big down the road.
Flexible credit inquiries
Usually, an automatic increase only involves a simple request (an issuer needs your consent to take a heavy toll on your credit). Soft draws have no impact on your credit. So, automatically updating a lender’s credit limit is a great way to increase your available credit amount without hurting your credit score by requesting more credit.
What if I don’t want a raise?
An automatic increase in your credit limit may come as a surprise, but in most cases it should be good. Your credit score can improve with a lower credit utilization rate. Plus, you’ll be able to charge more if you ever need to (you shouldn’t just because you can) and can collect cardholder rewards that you would otherwise miss out on when you pay cash.
If you are struggling with overspending and think the new limit will simply encourage more use of credit, you can call the issuer to ask them to reset your limit to its previous amount. Given the likely increase in your credit (and the potential opposite reaction equal to closing it), it’s worth considering other options first, like locking your credit card to make it harder to use for purchases you can’t afford.
To get ahead of automatic credit limit increases, call your credit card issuer and ask them to never increase your credit limit without your consent. Take this conversation in writing so you have a written record of the agreement.
The bottom line
Overall, automatic credit card limit increases are a good thing if you can handle the increased spending limit.
Your credit score can benefit, you’ll have more purchasing power if you need it, and managing a higher limit responsibly can help you work towards better rates and terms in the future. If you’re against increasing your credit limit automatically, don’t be afraid to tell your lender not to.