Dealing with an unwanted credit limit increase

By Michael Lloyd

For many people, an unexpected credit card limit increase is a pleasant surprise that demonstrates creditworthiness and offers a bit of extra spending power. For others, an unsolicited credit limit hike could exacerbate existing debt problems and encourage irresponsible spending.

Though some have called on the Financial Conduct Authority (FCA) to make it illegal for card issuers to impose unsolicited credit limit increases, as things stand, issuers can raise your limit at any time, as long as they notify you of the change.

This issuer action is not uncommon. According to January 2016 research from uSwitch, 19 million UK cardholders have received unrequested limit increases, some up to £2,500. Of these, about 24% (4.5 million) said the increase resulted in more spending, and more than 40% had no plans for how to deal with higher repayment instalments that resulted from that spending.raised-credit-limits

As it is, the UK is experiencing a significant rise in household borrowing, including credit cards, according to Jane Tully, head of insight and engagement at the Money Advice Trust, the charity that runs National Debtline.

"Many households will be able to manage this extra debt, but we remain concerned that a minority of people are resorting to credit just to make
ends meet," Tully said in an emailed response to questions.

For struggling consumers, a higher credit limit is not a positive reward.

Increased credit limit risks
Unfortunately, lenders can't always tell which of their customers might be struggling financially. While sensible card issuer wouldn't offer more credit
to a customer who regularly misses payments or exceeds their credit limit, some cardholders manage to make minimum payments each month despite being in significant money trouble. This can result in limit increases going to people who really shouldn't have access to more credit.

Now, an increased limit could help lower your credit utilisation ratio, which is the amount of credit you have compared to how much you use and accounts for a large portion of your credit score. For instance, if you have a £1,000 limit and use £500, an increase to £2,000 makes your ratio go from 50% to 25%, which can boost your score.

However, a credit limit increase will only be helpful if you don't immediately spend the additional credit you've been granted. If you're already struggling to make ends meet, a few hundred or a few thousand extra pounds in credit might be too tempting to pass up.

Conversely, accepting a higher credit limit and not using it could also make you appear riskier to other credit providers. Some lenders feel jittery about offering additional credit to consumers with too much unused credit.

A credit limit increase is only helpful if you are charging to your card regularly and paying back all or most of what you charge each month -- not if you're relying on credit to get you from one month to the next.

You can say no
If you feel an unsolicited limit increase could cause you problems, knock it back. The letter you received informing you of your credit limit hike should include details about what to do if you don't want it, but you can also just call your card issuer's customer service line.

You officially have a 30-day cooling-off period in which to tell your card issuer you don't want the new limit, but in reality, you should be able to ask for a credit limit reduction at any time.

Keep in mind that you won't be able to request a limit reduction if you've already started using your additional credit.

If you feel your lender was irresponsible to increase your limit, you can make a complaint to the Financial Ombudsman Service.

"It is really important to be aware and in control of your credit card limit -- and to treat taking on extra borrowing with the appropriate level of caution," Tully said.

See related: Extreme, creative ways to clear debt, 4 wrong ways to pay credit card debt

Published: 17 February 2016