You probably know that your credit card company may penalize you for late payments. But did you know that your card issuer also rewards responsible credit card behavior?
We’re not talking about getting bonus rewards or perks — instead, credit card issuers reward cardholders for timely payments by increasing their credit limit. It is usually automatic and you may not be notified about it. But as long as all other factors remain the same, it will improve your credit score. This means you shouldn’t start spending more or otherwise 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 to upgrade to a better card.
What is a line of credit?
“The credit limit is the maximum amount a card issuer can lend to a cardholder after approval for the card,” says Nathan Grant, senior credit industry analyst at credit card review site Credit Card Insider. In other words, it’s the amount you can make before you have to pay the balance. The maximum amount to load onto the card.
Your credit limit has a significant impact on your creditworthiness due to what is called credit utilization. This is the percentage of your available balance that you use at any given time, calculated by dividing your total outstanding balance by your total credit limit. “The higher your credit limit, the better your credit score,” says Jessica Weaver, CFP, CDFA, CFS, and author of Confessions of a Money Queen. Because if your credit limit increases and your balance stays the same, then the percentage of your available credit you use decreases, which can have a positive effect on your credit score.
Why is your credit limit automatically increasing?
If you find yourself getting a credit limit increase without applying, you should know that this is a common situation that is likely to help you rather than hurt you.
“Sometimes issuers automatically offer higher credit limits to cardholders in good standing,” Grant said. Weaver noted that credit card companies are happy to increase credit lines for people who use their cards a lot but still pay on time. There are several reasons why your credit card issuer might give you a raise:
- You always pay on time
- You report an increase in income
- You have been a cardholder for a long time.
Each issuer has different criteria for when to automatically increase the credit limit. However, if it happens to you, you should pat yourself on the back for maintaining a positive payment history. With your new line of credit, you’ll enjoy more flexibility when you spend with your credit card, and keeping your balance at previous levels may also improve your credit rating.
Need to spend more money?
Your credit limit tells you how much you can spend, not how much you should. “Just because you have a higher line of credit doesn’t mean you should spend more. You have more purchasing power, but that doesn’t mean you should take on more debt,” Grant said. In fact, you should focus on keeping your balance low, preferably below 30% of your credit limit. However, Weaver added that the higher credit limit “is a resource.” This means you can use it for emergency expenses or large one-time purchases you want to pay back instead of taking out a separate loan. However, in these cases, it’s better to have an emergency fund on hand or hold off on large purchases until you can pay in cash rather than having a balance on your card.
In general, though, you should be able to pay your credit card charges with money in your bank account, Weaver said. This means you should have a budget and don’t spend more than you can afford during the grace period. When you start to have a balance, it can negatively impact your credit utilization, and high credit card APRs mean that interest costs can quickly add up as well.
Will your APR change?
Your APR represents the total annual cost you must pay, including interest and fees, to have funds on your card. Many credit card issuers charge a penalty APR. Therefore, if you miss a payment, your APR may increase. However, automatically increasing your credit limit should not affect your APR. “Issuers don’t change their APRs based on that factor,” Grant said, noting that if you want a lower rate, you have to negotiate with your issuer individually.
Can I apply for a higher credit limit?
Even if your issuer doesn’t offer an auto-increasing line of credit, you may still want to apply for a larger line of credit if you’ve been making payments on time or your income has increased over time. The process for applying for a higher line of credit varies by issuer. “Some cards have a request link in your online account or in the app itself. Others may require you to call customer service,” Grant said. It never hurts to try to get a higher limit, and you may see your credit score increase if your credit card company approves an increase.
Are you ready to upgrade the map?
Automatically increasing the credit limit is a sign of consistent payment behavior. If you keep your debt low while making your payments on time, you may have noticed your credit score improving over time. This means you may be ready to use a better credit card if you start out with a student ID or an applicant with bad credit. Weaver recommends a credit score of 700 as a good goal before applying for a rewards card.
If your current credit card doesn’t fit your lifestyle, that’s another sign that it’s time to apply for a new one. “When you start using your credit card more often, you want to see what rewards are on your credit card,” Weaver said. Try choosing a rewards credit card that offers rewards in the categories you spend the most. Also keep an eye out for other bonuses and perks, and choose the card you use the most. 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 moment when applying for a new card, but you can continuously monitor your credit score and see available credit card offers. If you see your score is over 700 and you find a card is a better deal, it might be a good idea to apply. Remember, unless the card’s annual fee is no longer worth it, you should keep the old card open even after getting a new card to benefit from the account’s credit history.
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