67

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.
NL - SE listen to your users
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Diego
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7 Answers7

104

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. There is a fine line between someone who pays their bills late but does pay them (very profitable) and someone who simply stops paying completely (who may be an overall loss for the company, depending on how much they paid before they stopped).

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.

Peter Green
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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.

Yakk
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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.

TheKLF99
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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.

jamesqf
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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.

Michael
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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.

Jonathan
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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

Grade 'Eh' Bacon
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James Wierzba
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