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Why Did My Issuer Raise My Credit Limit?

 
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July 19, 2013
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QDear Erica,

The balance on my Discover is $8,780, and my credit limit has been $10,000. They just told me that my new limit is $20,000. Why did they increase my credit limit when I didn't ask? Does it hurt or help my credit? If it hurts my credit, can I ask them to go back to my old limit? Thanks. – Ryan

AHi Ryan,

I can understand how the credit card company's action is a little mystifying. It's counterintuitive. Because you're already in debt, it sure would seem to make more sense that they'd reduce your limit, not raise it.

Therefore, to answer your first question, Discover has upped your charging ability because they consider you to be an excellent credit risk. Clearly you have been spending with the card, but you also must be sending at least the minimum requested payments on schedule. These factors alone indicate that you're a responsible and valuable cardholder.Ask Erica

That may not be the only reason you're getting the raise, though.

While you do owe quite a bit of money to this particular issuer, maybe you've paid off other balances. For example, you could have sent your final car payment, satisfied an outstanding bill or paid down a balance on another card. Such activity can increase your FICO score, making you even more desirable to your remaining creditors.

Why? You see, while payment history is the most important factor in a FICO, “utilization” is a close second. Utilization refers to the amount of credit you're using up, compared to the amount of credit you have at your disposal (otherwise known as your credit limit). Lower utilization looks better to lenders because it shows you can have a lot of credit at your disposal, but not be tempted to use it all. If you recently started using less than 30 percent of your credit limit across all your cards, your score may have shot up, leaving you looking especially attractive.

Banks and lenders regularly check the credit ratings of their current customers to see what other products they may be eligible for — or to encourage their best customers to stick around. For some people, a bigger spending limit can be a sweet reward.

So that should help you figure out the answer to your second question: If a creditor increases your limit, will your credit score go up or down? Up, probably, because a higher limit will reduce your utilization ratio. You were nearing the top of your charging capacity on this particular card, but with the higher limit, you now owe comparatively less, thus pushing your score skyward.

A high FICO score is essential when shopping for a new loan or line of credit and, sometimes, life or auto insurance. It can also be beneficial when appealing to an current creditor for a better interest rate. But outside of that, a score is just a number. Far more important is your comprehensive financial health.

So is a higher credit limit right for you? I'd start by worrying less about the limit and more about your balance. Owing nearly $9,000 on a credit card for an extended period of time is destructive. It's too expensive because interest compounds. If your interest rate is high, you're paying far too much in fees. You're also digging into today's dollars to pay for yesterday's purchases. Whatever money you're sending to Discover each month is what you're not saving for today's bills and tomorrow's fun and security.

Obviously the credit limit hike is positive for your score, and the extended line can be convenient to have. You never know when you may need either. The only reason I would recommend lowering the credit limitis if a high limit encourages you to add even more to the balance or if you're less motivated to delete it. In that event, I say get on the phone and let the creditor know that you appreciate the offer, but you prefer to revert to your former arrangement.

Got a question for Erica? Send her an email.


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