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You may be aware that your credit card company may penalize you for late payments. But did you know that your issuer will also reward your responsible credit card behavior?
We’re not talking about getting bonus rewards or extra perks; instead, credit card issuers reward cardholders for on-time payments with increased credit limits. It is often automatic and you may not be notified that it is happening. But it will improve your credit score as long as all other factors remain the same. That means you don’t have to start spending more or change your payment habits.
Here’s everything you need to know about an automatic credit limit increase, plus some tips on how to know when it’s time to switch to a better card.
What is a credit limit?
“A credit limit is the maximum amount that the card issuer has loaned to the cardholder once they have been approved for a credit card,” says Nathan Grant, senior credit industry analyst at Credit Card Insider. , a credit card review site. In other words, it’s the most you can load on your card before the balance is due.
Your credit limit will have a significant effect on your credit score due to what is known as your credit utilization ratio. That’s the percentage of your available credit that you’re using at any given time and is calculated by dividing your total outstanding balance by your total credit limit. “Typically, 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 balance stays the same, you will use a lower percentage of your available credit, which will have a positive impact on your credit score.
Why did your credit limit automatically increase?
If you discover that you received a credit limit increase without asking for it, know that this is a common thing that will probably help you, not hurt you.
“Sometimes issuers automatically give cardholders in good standing a higher credit limit,” says Grant. Weaver points out that credit card companies like to give credit limit increases to people who use their cards often but also make their payments on time. There are a few reasons your credit card issuer may have given you a raise:
- You have always made your payments on time.
- You reported an increase in income
- You have been a cardholder for a long time.
Each issuer has different criteria for when an automatic credit limit increase will occur. But if it happens to you, you should pat yourself on the back for maintaining a positive payment history. With your new credit limit, you can enjoy more flexibility in spending with your credit card, and if you maintain your balances as before, you’ll likely see your credit score rise, too.
Do you have to spend more?
Your credit limit tells you how much can spend, not how much they should spend. “Just because you have a higher credit limit doesn’t mean you should spend more. You have more purchasing power, but that doesn’t mean you should rack up more debt,” says Grant. In fact, you should focus on keeping your balances low, ideally below 30% of your credit limit. However, adds Weaver, the higher credit limit “is there as a resource.” That means you could use it for an emergency expense or a one-time large purchase that you have a plan to pay for, instead of taking out a separate loan. However, having an emergency fund on hand or delaying a large purchase until you can pay for it in cash is still preferable to carrying a balance on your card in these situations.
In general, though, “you should be able to pay your credit card with the money that’s in your bank account,” says Weaver. That means you should budget and never spend more than you can afford during the grace period. If you start to carry a balance, it will negatively affect your credit utilization ratio, and high credit card APRs mean that interest charges can add up quickly, too.
Will your APR change?
Your APR represents the total annual cost, including interest and fees, that you’ll pay to carry a balance on your card. Many credit card issuers charge penalty APRs, so if you miss a payment, your APR may increase. But an automatic credit limit increase should have no effect on your APR. “Issuers won’t change their APR because of that factor,” Grant says, noting that you’d need to negotiate with your issuer separately if you want a lower rate.
Can I request a higher credit limit?
Even if your issuer doesn’t offer automatic credit line increases, you may want to request a higher credit limit if you’ve been making on-time payments for a while or have seen an increase in your income. The process for requesting a higher credit limit varies by issuer. “Some cards will have an application link directly in your online account or in the application itself. Others may ask you to call customer service,” says Grant. It never hurts to try to get a higher limit, and if your credit card company approves the increase, you’ll likely see an increase in your credit score.
Some credit card issuers allow you to apply for a higher credit limit online. If you’ve been making consistent, on-time payments for a while, or if you’ve seen an improvement in your credit score, try this option.
Ready for a card upgrade?
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 seen your credit score improve over time. That means you could be ready for a better credit card if you started with a student card or one designed for bad credit applicants. Weaver recommends a credit score of 700 as a good benchmark to 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’re starting to use your credit card more and more, you’ll want to see what the credit card rewards are,” says Weaver. Try to choose a rewards credit card that offers rewards for the categories you spend the most on. Also pay attention to other bonuses and benefits, and choose the card that will get the most out of you. For example, if you’re planning a trip abroad, you might want a travel rewards card with no foreign transaction fees.
There’s no magic time when you should apply for a new card, but you can continually monitor your credit score and review available credit card offers. If you see that your score exceeds 700 Y If you find a card that offers more bang for your buck, it’s probably a good idea to apply. Just remember that even after you get a new card, you’ll probably have to keep your old card open to benefit from that account’s credit history, unless the card charges an annual fee that’s no longer worth it.