62

Today I received a letter from the bank that issued my credit card. Basically it says that, since I'm "one of their best customers" my credit (card) limit has been increased.

This is the second time that they have done this. The first time I didn't give it much thought. I'm a legal resident in the United States, so I knew that I would need to build a "credit history" for myself here and I though that it was a good sign that they would increase my credit limit after a couple years.

After this happened the second time, I wonder if there could be a "catch" on this. I mean, what is my bank's real motivation for allowing me to spend more money. Are the any pitfalls (besides the obvious "don't get into too much debt. Don't buy things that you cannot really afford") I should avoid?

Additional info:

  • I'm a legal resident in the US.
  • I have had this credit card for around 4 years now.
  • I make a sensible use of my card. I never had an issue paying my balance.
  • 22
    The pitfalls are the "obvious" ones you identified. They aren't obvious to everyone. Having the higher limit without higher use will help your credit score, which is good for you. Congrats on being responsible with your card this far, and keep up the good work! – WBT May 1 '17 at 18:04
  • 5
    Something worth noting: one of the factors involved in credit-score calculation is the ratio of the average amount of credit you use to the average amount of available credit you have. The algorithms are of course quite secret (since they want to prevent people from gaming the system), but from what I understand it's good to try to keep your credit used at about a third of the total credit you have available. (I expect it's better if your ratio is too low than if it's too high, so in general an increase in your credit limit should probably help rather than hurt you.) – Kyle Strand May 1 '17 at 18:47
  • 14
    By "one of our best customers" they mean "one of the most boring/prudent". They're tempting you to spend more and become a more confident and adventurous cow! Also, a more "milkable" one. Isn't that exciting? THEN you will definitely be one of their best customers :) – xDaizu May 3 '17 at 12:27
  • 1
    as a sidenote mind you that when you have a higher limit and your card get stolen or skimmed chances are you will loose more money because criminals get to purchase more goods. – Jan May 7 '17 at 13:30
  • 3
    @Jan's comment is inaccurate in almost all cases. Federal law limits your liability to $50 for unauthorized charges reported after the fact. If you report your card lost before any charges are made, you have no liability. If you still have the card and it's a skim or stolen number, you have no liability. In practice (specifically mine, and family and friend's experience), it's rare that you will ever pay anything for fraudulent cred card charges. Source: consumer.ftc.gov/articles/… – charleswj81 May 20 '17 at 17:12
99

After this happened the second time, I wonder if there could be a "catch" on this.

No

I mean, what is my bank's real motivation for allowing me to spend more money.

Credit card companies make money in a few ways.

  1. Whenever you buy something on the card they get a cut of the merchant fees, the more you buy on the card the more money they make.
  2. When people buy stuff and don't pay it off immediately they generally (the exception being promotional deals) get to charge interest. Often at a very high rate.
  3. When people miss payments they get to charge them fees and take away any promotional deals.

By giving you a higher limit the credit card company hopes you will spend more on the card. This immediately gets them more merchant fees and if they are lucky means you will have to carry the balance for a while earning them interest. If they get really lucky you will miss a payment or two earning them some fees.

Of course if they let you borrow too much you might never pay it back.

So the credit limit is a balancing act. Letting you borrow more money gives them the potential to make more money but also the potential to lose more money. As you build up a history of paying as agreed they feel comfortable lending you more money.

  • 25
    +1 for the answer but lucky -- a simple study in America shows that we (Americans) are carrying 779$ billion dollars in credit card debt. Credit card companies don't have to get lucky to expect that some customers are going to miss payments and carry balances. – USER_8675309 May 1 '17 at 13:19
  • 11
    Looks like the report @USER_8675309 is referring to is this one. – Peter K. May 1 '17 at 14:23
  • 1
    @PeterK thanks for the sourcing. I meant to loop back around and get a link in but was caught up – USER_8675309 May 1 '17 at 15:44
  • 6
    Good work guys for the citation. A key stat to look at (its at the bottom) is the difference between the average CC debt per household and the average debt per household with CC debt. Those without CC debt skews the average per household way down. – Pete B. May 1 '17 at 17:19
  • 6
    For the records, on this answer, I actually had a credit card canceled by a bank for not using it. After a few years, I guess they just gave up and canceled the card. – Ironluca May 2 '17 at 13:23
24

There are two very small catches.

You have just increased your available credit. In some cases when you want to make a loan, they will check your available credit against your creditworthiness (your income and credit history).

In the short term with a greater credit limit, you may have more difficulty getting a large loan. On the other hand, your greater credit limit will make you seem more creditworthy (as you have been walking around with the ability to borrow a whole pile and demonstrated the ability to not go bankrupt).

The other possible catch is that if something goes wrong and your credit line is maxed (maybe you have a psychotic episode; maybe you give your credit card and pin number to someone who buys a car on you), your liability is larger.

If you can maintain spending discipline and don't need every ounce of credit head room right now, neither of these apply. In the medium to long term, a lower credit utilization and a higher total limit will make you more creditworthy.

  • 3
    Yes. This. Folks saying it's a pure reward to a good customer are wrong. They want to pre-reserve a larger share of your credit-worthyness for themselves, should you want to increase your borrowing at a future date. It's cut-throat competition between banks, and you are the ammunition! – nigel222 May 2 '17 at 14:24
  • There may also be a societal risk if they end up driving up everybody's available credit and make us appear in aggregate to be a better risk than we are. Have they forgotten the results of "liar loans" in the housing market already? I fear that the credit card industry may be the source of the next financial crisis, within a decade. – nigel222 May 2 '17 at 14:27
  • [citation needed]. For a long time, I didn't have any credit card except one with a $600 limit I got in my early 20s. More recently I opened a few accounts to get some "cash back" cards, and immediately added 100 points to my credit score. The bank "credit check" tools say that the credit used to credit available ratio has a "large" impact on the score, and opening these new cards got me an "excellent" score. Plain "credit available" doesn't appear to be in their scoring at all, as far as I see. – Phil Frost May 3 '17 at 17:10
  • 1
    @PhilFrost Sure, here: moneysense.ca/spend/real-estate/… -- like I said, this mainly has to do with large loans. The idea is that they want to ensure your income is sufficient to service your potential debts. – Yakk May 3 '17 at 17:57
  • @PhilFrost Your credit score doesn't determine how much money a bank will loan you. It's a measure of risk, so your credit score determines what interest rate you'll get or whether they'll willing to lend you money at all. A billionaire will the same credit score as you can borrow a lot more money. When making a loan a bank will look at your income and existing debt to determine how much money you can afford to borrow. The full amount of your all your credit card's limits (and lines of credit) count as existing debt because there's nothing stopping you from borrowing that full amount. – Ross Ridge May 5 '17 at 8:41
19

There is only a catch if you swallow the hook. The hook is that the bank hopes you will use the increased credit limit to buy more stuff, and not pay what you owe before the interest-free period expires. This will allow them to charge their high interest rate on the outstanding balance. Now if you don't increase your spending, and keep paying your balance in full, nothing happens.

  • Though note that the card issuer makes more money from merchant fees when you spend more, even if you never pay a penny in interest. – David Richerby May 3 '17 at 17:48
  • @David Richerby: True, but the fact that the credit limits on most of my cards are $10K or more does not change the fact that my total monthly spending is usually less than $500. But then, I'm an outlier :-) – jamesqf May 3 '17 at 18:05
19

There is one massive catch in this which I found out when I went to Nationwide to ask for a loan.

I've got a credit card which they kept increasing my credit limit, it's now at something ridiculous - nearly £10,000 but they keep increasing it.

I never use that card, when I went to Nationwide though they said they couldn't give me a loan because I had £10,000 credit already and if I reduced this credit this would affect my credit rating and they could potentially give me a loan.

I then realised what MBNA had craftily done. I have two cards with this bank, one with really low interest and the other with really high interest (and a high credit limit) - even though the other card has a zero balance loan companies still see it as money I could potentially go and spend, it doesn't matter to them that I've not spent any money on that card in about 12 months, to them it's the fact that they could give me a loan and then I could go and spend another £10,000 on that card (as you can see extremely risky).

Of course this means that what MBNA are craftily doing is giving me such a high credit, knowing full well that I'm not going to use it, but it also prevents their competitors from offering me a loan, even at a lower rate, because I've already got too much credit available.

So yes there is a catch to giving you a high credit limit on your cards and it's to prevent you from either leaving that bank or getting a lower interest rate loan out to clear the debt.

  • 4
    this is unlikely to be relevant in the US. As a general rule, a higher credit limit increases your credit rating (in the US). – Joel May 2 '17 at 2:00
  • 1
    This sounds like loan companies made a very poor risk estimation in your case. Or perhaps they weren't to give you a loan anyway and needed an excuse. – Dmitry Grigoryev May 2 '17 at 10:41
  • 5
    @Joel I've seen this brought up in the US as well. I assume it's a variation on the natural borrowing limit. Just as banks won't let you borrow money if you already have outstanding loans that hit that limit, they also look at your total available credit before extending more. If you open credit lines with five banks for 100k total and don't have the income to justify that available credit you're going to have a hard time getting a loan or a new card, even with 0% utilization. Each bank will probably handle this differently but it is one of the few "risks" of increasing your credit limit. – Lilienthal May 2 '17 at 11:59
  • MBNA's goal is not to make it impossible for you to get a loan. They are quite unlikely to treat you more favorably in that regard than others -- just because they don't see your current credit limit as too risky does not at all mean that they would not also conclude that adding a loan on top of it would be too risky. – Matthew Read May 5 '17 at 8:02
8

There is no catch. You've been a good customer and your bank wants to reward you for it. One of the ways you build credit is by having more credit available. So by increasing your credit limit, its lowering your credit utilization rate (one of the factors that go into your credit score) - which is a good thing. So your bank trusts you with more credit, which again is a good thing. You can also request a line of credit increase yourself without waiting for the bank to do so - but there's a 6 month wait between each increase, assuming you get one. I always ask every 6 months and have gotten approved each time, and it's helped my credit score tremendously.

  • +1. I wasn't aware of the "credit utilization rate" so that was really useful to know. I'll keep track of my credit limit increases. – Diego May 1 '17 at 12:42
  • Increased credit can be good as you say - but when/if you close the account, the larger drop in available credit can hurt your credit score as well. – sirjonsnow May 1 '17 at 15:34
  • 1
    @Diego it matters a LOT. My utilisation rate went from 5% to 22% and it dropped my credit score by nearly 100 points. – Kat May 1 '17 at 16:15
  • 4
    I wouldn't exactly say they "want to reward you", more like they trust this will work out for them. – jhocking May 1 '17 at 18:28
  • Note that if it lowers your credit utilization too much (to under 5%) it can hurt your credit score. – Matthew Read May 5 '17 at 8:04
2

One of the things that you have to be aware of is a little gotcha in the credit utilization rate. They, or at least the credit company I worked for, used the "high balance" in figuring the credit utilization, not the ending balance. For example, say you had a single card with a $2000 credit limit and used it to charge everything during the month. Say that the high balance was $1900 and you paid it down to zero at the end of the month. The company would calculate your credit utilization at 95%. This is not good and not really fair, but that was the way it was done. Increasing the credit limit helps, but you can also usually make interim payments, say as a paycheck comes in, during the month, if you have an online account.

  • This is no longer completely true. Credit scoring has recently changed. It now takes into account your credit utilization history. And also you can now get dinged for having too high of an available credit balance, as it is now considered a risk factor. – James Wierzba Sep 26 '17 at 21:54
1

Credit scoring has changed since the time of this question (July 2017) and it is now possible that having a high available credit balance can negatively affect your credit score.

... VantageScore will now mark a borrower negatively for having excessively large credit card limits, on the theory that the person could run up a high credit card debt quickly. Those who have prime credit scores may be hurt the most, since they are most likely to have multiple cards open. But those who like to play the credit card rewards program points game could be affected as well.

source

  • This is a very good answer. If you are so inclined, you may want to see if other questions would benefit from it, or ask a question yourself that has this as an answer. – Grade 'Eh' Bacon Sep 27 '17 at 13:07

protected by Dheer Jun 15 '17 at 1:16

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.