Why Did My Card Issuer Increase My Credit Limit?

Life is full of surprises — some good and some bad. Waking up one day to a credit limit increase that you didn’t apply for can be a good or bad surprise, depending on how you look at it.

Let’s examine why credit card issuers increase credit limits without input from the cardholder and what the fallout (good and bad) of an increase can be.

What is a credit limit?

Your credit limit is the total amount you’re allowed to charge to your credit card at once. A credit limit includes any new purchases and any old purchases that haven’t been paid off. Your annual fee is also charged against your credit limit.

For example, if you have a $10,000 credit limit, 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 anymore. Generally, if you try to make a charge that will put you past 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 score and credit history to gauge whether you’re a responsible borrower and what credit limit and interest rates you can qualify for. The stronger your credit history is, the higher your limit will likely be.

Why did my issuer increase my credit without asking?

So why do credit card issuers do this without asking? If you pay your bill on time each month and have managed your credit card responsibly overall, there may come a day when your credit card company alerts you that your credit limit has been increased. In some cases, they may offer you an increase and give you an opportunity to accept or decline it, but sometimes they do this without asking for your input.

The main reasons that credit card issuers do this are to:

• Upgrade the buying power of their starter credit cards: Many starter credit cards, such as secured credit cards and student credit cards, come with low credit limits — sometimes only a few hundred dollars. These cards often offer future credit limit increases to those who can show responsible credit usage.
• Help increase their customer retention: Many customers see an increased credit limit as a good thing, even if they don’t intend to change their spending habits. By providing these increases without forcing customers to ask first, the issuer is being proactive and hopefully keeping their customers happy.
• Encourage responsible borrowers to spend more on their credit cards: With an increased credit limit, an issuer may be able to encourage cardholders to make larger purchases than they were previously — something that’s good for the issuer’s bottom line.

But why did they choose you? If you have a credit card geared toward building credit and you’ve shown responsible credit habits, your issuer might just be making good on their offer from when you first signed up for the card. It can also happen if you report an increase in income. Credit card issuers also sometimes place their longtime customers on a built-in path to a higher credit limit to reward their loyalty.

Benefits of a credit card limit increase

It can be surprising when your credit limit is increased without you requesting it. On the bright side, there are some benefits that come along with a credit limit increase.

Improved credit utilization

One of the most important factors when determining your credit score is your credit utilization ratio. Your credit utilization ratio represents how much credit you have available to you versus how much you’re using.

This ratio accounts for 30 percent of your FICO credit score, and the lower this ratio is, the better. When your credit limit increases, your credit utilization ratio drops by default. Just be careful not to spend up a storm, or your ratio will rise again.

More purchasing power

If you have some big purchases on the horizon and have a plan to pay for them, having a higher credit limit can give you more purchasing power. The more you use your credit card, the more rewards you can gain. Just make sure you can afford to pay your bills on time before you make any purchases, so you earn rewards without going into debt.

On the flip side, if you have credit card debt to pay down on other cards or are working on building your savings, having an increased credit limit may create spending temptations that distract you from your goals. Keep a close eye on your spending if you receive an automatic increase.

Better terms in the future

Having a higher credit limit and a lower credit utilization ratio can lead to a better credit score. The better your credit score is, the better terms and interest rates you’ll qualify for in the future. Using a higher credit limit to strengthen your score can pay off big time down the road.

Soft credit inquiries

Generally, an automatic increase involves only a soft inquiry (an issuer requires your consent to make a hard pull on your credit). Soft pulls 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 dinging your credit score by applying for more credit.

What if I didn’t want an increase?

An automatic credit limit increase can come as a surprise, but for the most part, it should be a good one. Your credit score may improve thanks to having a lower credit utilization ratio. Plus, you’ll be able to charge more if you ever need to (you shouldn’t just because you can) and you can collect the cardholder rewards you otherwise miss out on when you pay in cash.

If you’re struggling with overspending and think the new limit will just encourage more credit usage, you can call the issuer to request that they reset your limit to its previous amount. Given the likely positive boost to your credit (and potential opposite reaction to resetting it), it’s worth considering some other options first. For example, consider freezing and stashing away your credit card to make it harder to use on purchases you can’t afford.

To get ahead of automatic credit limit increases, give your credit card issuer a call and request that it never 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 manage the increased spending limit, especially if the increase is for a card that had a low credit limit to begin with, such as a student card or secured card.

With a higher credit limit, your credit score can benefit, and you’ll have more spending power should you need it. Plus, managing a higher limit responsibly can help you work toward better rates and terms in the future. If you’re against receiving automatic credit limit increases, however, don’t be afraid to tell your lender not to do them.