How to handle a sudden limit increase

By Benjamin Salisbury

If your credit card issuer offers to increase your credit limit, it can be tempting to accept it. After all, it could mean more breathing room for emergencies, or extra help if you need to make a large purchase. However, it's important to consider what you can actually afford; otherwise, you could end up racking up debt and paying high interest fees.

It's not unusual for card issuers to hike your credit record if you're a good customer. A February 2015 poll for The Debt Advisory Centre shows that around 15 million British credit card holders had their credit limits raised in the previous year -- without them asking. More than a third of that number said the limit increased by more than £1,000, with the average increase being £750. raised-limit

Why your issuer may raise your limit
Card issuers raise limits because they judge that they can make money
out of the extra interest charges that could accrue as a result. A higher
limit could encourage you to spend more than you normally might, especially
if your financial ego is boosted by the idea that you "earned" the increased limit, so you deserve to spend it.

Most banks have an automatic account adjustment programme, which will routinely assess your account to see if you are due for a limit increase. If they judge you to be a fair risk, then they may raise your limit.

The Debt Advisory Centre data also showed that young people (between
the ages of 25 and 34) are more likely to be given an increase. That's because people in this age group are generally starting families and buying first homes; money is more likely to be tight with this age group, so they are more likely to use the extra credit. However, most people in this group are working full time, ensuring they can pay at least the minimum payments. These factors cause lenders see this group as a secure risk.

Finally, you may get an increased limit as a way to keep you loyal. "One of the main reasons that credit card companies increase limits is customer retention," Melanie Taylor, a spokesperson for the Debt Advisory Centre, said in an emailed response to questions. "If you have more credit available with one company then you are less likely to borrow from an alternative credit card company."

On the bright side, if an issuer does automatically raise your limit, Taylor said, it is "usually a sign that the bank trusts you with your repayments, which means that your credit score is high."

Rejecting the new limit
According to the Debt Advisory Centre poll, about a quarter of those surveyed contacted their lender to reject the increase.

"You have every right to refuse a limit increase," Taylor said. "You can contact your bank via phone, email or post and request that they reduce your limit back down to a manageable level. If you plan to do this, remember that the limit cannot be set below your current balance."

You can also avoid future raises by telling your issuer you want to opt out of automatic increases.

However, remember that it will not necessarily benefit you to reject the limit increase, then apply for another credit card. Not only do you keep the risk of spending more than you can afford, but other lenders (such as mortgage lenders) in the future may not look favourably on you having various credit balances with several different issuers.

Effect on your credit score
Increasing your credit card limit can have an impact on your credit score, but not always, Laura Barrett, senior regulatory and compliance officer at Equifax Consumer Affairs, said in an emailed response to questions. The exact nature of the impact depends on what other credit you use and how you manage that credit. If you accept the increase, manage the repayments and reduce your balance, your credit score is unlikely to be affected.

And if you are using more than 30% of your current limit, an increase can help your debt utilisation ratio -- how much credit you have available vs. how much you use -- as long as you don't use the new limit as an excuse to spend more.

The same holds true for reducing your limit.

"Generally speaking, reducing your credit limit should not have a major impact on your credit score; however, this will not be true if reducing your credit limit causes a significant shift in the amount of credit being utilised," added Laura.

See related: Understanding and avoiding credit card fees, Your options if your card issuer changes your agreement

Published: 13 May 2015