Why do credit cards automatically increase your limit? Sometimes banks will extend your line proactively, without the customer even asking. Other times the lenders will boost lines in response to a request from the customer.
Remember that banks make money by lending to borrowers likely to generate income, without defaulting on their debts. The decision whether to increase your limit can be mysterious. Each lender has unique rules. However, many basic practices are followed and may apply across the board.
- Why credit cards have balance ceilings
- Who qualifies for line expansions
- Why banks automatically grant increases
Why Credit Cards Increase Your Limit without Asking
Credit card companies often increase your limit automatically. That means you get a bigger line without having to ask. They want to lend money to profitable customers and keep profitable ones from borrowing from other lenders.
When you open the account, the bank has little information about you.They make an approval and credit line decision based solely upon your consumer report:
- Summary information about how you handle debt with other lenders
- Available to all lenders with a permissible purpose
Banks will often set lower initial limits on new accounts to protect themselves from losses until they get to know you better. As you use the account, they learn more about how you handle money. They gain valuable insight into your ability to manage debt. These data differ from consumer reports in two ways:
- Detailed information about spending and repayment
- Proprietary data that is never shared with a consumer-reporting bureau
Companies will often proactively increase credit card limits to gain a greater “share of wallet” for their most profitable accounts. The higher the line, the greater chance they can capture and control detailed information about you that they never have to share. The lender that controls the greatest portion of spending has a decided information advantage over any other card in your wallet.
Request a personal loan if your borrowing credentials have improved and the credit card company wants more of your business. Do not fall into the trap of carrying a high-interest revolving balance just because you now have more spending power. A close-ended contract forces borrowers to retire debt.
Meaning of Changes
When a bank increases your credit limit automatically, it means they have greater confidence in your ability to manage the account responsibly. The line determines the total amount of charges that can be outstanding during any single billing period. You can continue placing charges until you reach the maximum amount. After that point, they will decline all future charges until you pay down a portion of the outstanding balance, and create an “open to buy” amount on your account.
A higher limit may improve your risk score. The new threshold appears on your consumer report within 30 days and signals other lenders to the new confidence level. It also lowers your utilization ratio, which improves scores.
Banks assign credit ceilings to protect themselves from losses. Rather than issue a small number of accounts with very high maximums, they prefer to issue a larger number with relatively small lines. This helps diversify their risks. When an account defaults, they may lose the entire outstanding balance.
Without Hard Inquiry
When banks proactively increase your credit limit, they often do so without logging a hard inquiry on your file. They typically will look at two data sources: your consumer report, and your behavior with your account.
- Your consumer report provides information about how you are handling debt with other lenders. This report is used when you originally apply and on a periodic basis while you remain a customer. The bureaus log soft inquiries during this process.
- Your account behavior is visible only to the bank. They track the type of purchases you make, and the amount of interchange and interest revenues you generate. They do not log any inquiry when reviewing internal data.
Companies do not need your permission to perform this process – they already have it! The membership agreement and the FCRA give them the right to review your file and make changes to account terms when justified.
Frequency of Changes
The higher your credit limit, the greater the amount of loss to the bank should you default on the loans. On the other hand, the greater the line the more you may charge. This grows revenues for the lender through interchange fees, and often higher interest income, and late fee income.
Banks will increase your limit when they feel confident that the potential revenue attached to a bigger balance outweighs the rise in potential losses. They do this as often as it makes business sense, and as they detect changes in your behavior.
Credit Card Increase Limit Application Forms
Consumers often request a credit limit increase and may complete an application form to facilitate the process. They may have an upcoming need to borrow more, or make a major purchase and would like the added financial flexibility. Consumers have two means to enhance their ceiling:
- Request an increase from their existing accounts(s)
- Open a new account with another company
The application form may require income, non-bank obligation, and other criteria to help them determine if you can handle expanded balances. When you contact your credit card company to request an increase, the customer service person answering the phone knows you may have options.
Preapproved offers often target their most profitable customers.
Change in Income
As addressed above, we know that banks often proactively grant higher limits, and have set a maximum. Your request is a signal that your spending and borrowing are about to change. Most people requesting larger lines have a reason for doing so. They could want to:
- Expand the balance they are paying interest on
- Make a large purchase
- Ramp up their spending levels
The bank knows nothing about your income unless you tell them. The application form will ask about changes in income. If your compensation level has improved, you can handle larger revolving balances and monthly payments.
The customer service person has to decide whether to grant your request. Most companies anticipate that these requests will occur, and have a scoring system in place. They employ criteria based upon information in your consumer report and your behavior on the account that gives their customer service representatives a clue about how to handle the call:
- Red: unprofitable account that does not warrant a bigger line
- Yellow: marginally profitable account that may warrant a small boost
- Green: profitable account worth trying to keep with a larger increase
The application form requires information about your non-banking relationships. This information does not appear on your consumer report but may add to their existing scoring system, and help them break any ties.