You may be aware that your credit card company can penalize you for late payments. But did you know that your issuer will also reward your credit card’s responsible behavior?
We’re not talking about earning extra rewards or extra perks – instead, credit card issuers reward cardholders for their on-time payments while increasing the credit limit. Often this is automatic, and you may not be notified that it happened. But it will improve your credit score as long as all other factors remain the same. This means that you should not start spending more or change your payment habits.
Here’s everything you need to know about automatically increasing your credit limit, plus some tips on how to know when it’s time to upgrade to a better card.
What is the credit limit?
“The credit limit is the maximum amount a card issuer has loaned to a cardholder once they are approved for a credit card,” says Nathan Grant, senior credit industry analyst at Credit Card Insider, a credit card review site. In other words, you will be able to deduct the maximum amount from your card before you are required to pay off the balance.
Your credit limit will have a significant impact on your credit score because of what is known as your credit utilization ratio. This is the percentage of your available credit that you use at any given time and is calculated by dividing your total outstanding balance by your total credit limit. “Usually, the higher your credit limit, the better your credit score,” says Jessica Weaver, CFP, CDFA, CFS, and author of “Confessions of a Money Queen.” This is because if your credit limit increases and your credit remains the same, you will be using a lower percentage of your available credit, which will positively affect your credit score.
Why did your credit limit increase automatically?
If you find that you’ve received a credit limit increase without asking for one, know that this is a common occurrence that will likely help, not hurt you.
“Sometimes issuers automatically give cardholders in good standing a higher credit limit,” Grant says. Weaver notes that credit card companies prefer to increase the credit limit for people who use their cards frequently but also make their payments on time. There are several reasons why your credit card issuer might give you a raise:
- You have consistently made your payments on time
- reported an increase in income
- I’ve been a card holder for a long time
Each issuer has different criteria for when an automatic credit limit increase will occur. But if it does happen to you, you should pat yourself on the back for maintaining a positive pay history. With the new credit limit, you can enjoy more flexibility in spending with your credit card, and if you keep your balances as they were before, you’ll also likely see an increase in your credit score.
Should you spend more?
Your credit limit tells you how much you are can Do not spend how much you Must spent. “Just because you have a higher credit line doesn’t mean you should spend more. You have more purchasing power, but that doesn’t mean you should accumulate more debt.” In fact, you should focus on keeping your balances low, by Ideally less than 30% of your credit limit.However, Weaver adds, the upper limit of credit “exists as a resource.” This means you can use it for emergency expenses or a large one-time purchase and have a plan to pay it off, rather than taking out a separate loan However, having an emergency fund on hand or putting off a large purchase until you can pay with cash is still better than carrying a balance on your card in these situations.
In general, though, Weaver says, “You should be able to pay off your credit card with the money in your bank account.” This means that you should have a budget and not spend more than you can repay during the grace period. If you start holding a balance, it will negatively impact your credit utilization ratio, and the credit card’s high APRs mean that interest fees can add up quickly as well.
Will your annual percentage change?
The annual interest rate (APR) is the total annual cost, including interest and fees, that you’ll pay to carry a balance on your card. Many credit card issuers charge the APR for the penalty, so if you miss a payment, you may see an APR increase. But the automatic increase in the credit limit should have no effect on the APR. “The issuers will not change your APR because of this factor,” Grant says, who notes that you’ll need to negotiate with your issuer separately if you want a lower rate.
Can you request a higher credit limit?
Even if your issuer doesn’t offer automatic credit limit increases, you may still want to request a higher credit limit if you’ve been making payments on time for a while or have had an increase in your income. The process for requesting a higher credit limit varies by issuer. “Some cards will have an order link directly in your online account or in the app itself. Others may ask you to contact customer service,” Grant says. It never hurts to try to get a higher limit, and if your credit card company agrees to an increase, it is You will likely see an increase in your credit score.
Some credit card issuers allow you to request a higher credit limit online. If you’ve made fixed payments on time for some time, or seen an improvement in your credit score, try this option.
Are you ready to upgrade the card?
An automatic credit limit increase is a sign of a consistent payment history. If you’ve also kept your debt balances low in addition to making payments on time, you may have noticed that your credit score has improved over time. This means that you may be ready for a better credit card if you start with a student card or one designed for bad applicants. Weaver recommends a good 700 credit score that you should aim for before applying for a rewards card.
If your current credit card doesn’t match your lifestyle, that’s another sign that it’s time to apply for a new one. “If you start using your credit card more and more, you’ll want to take a look at the rewards on the credit card,” Weaver says. Aim to choose a rewards credit card that offers rewards for the categories in which you spend the most. Also pay attention to other bonuses and perks, and choose the card that you will get the most out of. For example, if you are planning a trip abroad, you may want to get a travel rewards card with no foreign transaction fees.
There is no magic moment when you have to apply for a new card, but you can constantly monitor your credit score and review the available credit card offers. If you see your score go above 700 And If you find a card that offers more bang for your buck, you better place an order. Just remember that even after you get a new card, your old card will likely still be open to take advantage of that account’s credit history, unless the card charges an annual fee that’s no longer worth it.