Life is full of surprises, some good and some bad. Waking up one day with a credit limit increase you didn’t ask for can be a good or bad surprise depending on your perspective.
Let’s take a look at why credit card issuers increase credit limits without cardholder intervention and what the fallout (good and bad) can be from an increase.
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 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 won’t be allowed to spend any more. Generally, if you try to do a load that cause you to go over 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 predefined credit limit. The other option is for the lender to look at your credit score 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 qualify for. The more your credit history that is, the higher your limit will be.
Why did my issuer increase my credit without asking?
Getting back to unsolicited credit limit increases, why are credit card issuers doing this without asking? If you pay your bill on time each month and have generally managed your credit card responsibly, one day your credit card company may notify 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 your opinion.
One of the main reasons credit card issuers do this is to help increase customer loyalty and encourage responsible borrowers to spend more on their credit cards each month.
But why did they choose you? This may happen because you are considered a responsible customer. This can also happen if you declare an increase in your income. In some cases, credit card issuers have a built-in customer path 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 to better understand how it might happen again in the future.
Benefits of a credit card limit increase
It may be surprising that your credit limit is increased without your being asked. On the bright side, there are plenty of benefits that come with a credit limit increase 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 ratio represents the amount of credit you have compared to the amount you use.
This ratio represents 30% of your score and the lower this 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 some big purchases on the horizon and you have a plan to pay them off, having 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 pay your bill on time before making purchases to earn rewards without going into debt.
On the other hand, if you have credit card debt to pay off on other cards or are working on building up your savings, having a higher credit limit can create spending temptations. that distract you from your goals. Keep an eye on your spending if you receive an automatic raise.
Better conditions in the future
A higher credit limit and lower credit utilization rate can lead to a better credit score. The better your credit score, 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 applications
Typically, an automatic raise only involves a soft request (an issuer needs your consent to make a hard draw on your credit). Soft draws don’t impact your credit. That being said, an automatic credit limit update from a lender is a great way to increase your amount of available credit without hurting your credit score by asking for more credit.
What if I don’t want a raise?
An automatic credit limit increase may come as a surprise, but in most cases it should be fine. Your credit score can improve with a lower credit utilization rate. Plus, you’ll be able to charge more if you need to (you shouldn’t just because you can) and you can collect cardholder rewards you otherwise miss out on when paying cash.
If you’re struggling with overspending and think the new limit will only encourage more credit use, you can call the issuer and ask them to reset your limit to its previous amount. Given the likely positive increase in your credit (and the potential equal opposite reaction to closing it), it’s worth considering other options first. For example, consider putting away your credit card to make it harder to use for purchases you can’t afford.
To anticipate automatic credit limit increases, call your credit card issuer and ask them never to increase your credit limit without your consent. Follow up on 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 spending limit increase. Your credit score can benefit, you’ll have more buying power if you need it, and responsibly managing a higher limit can help you work toward better rates and terms in the future. If you’re against automatic credit limit increases, don’t be afraid to tell your lender not to.