Credit Card Limits: Auto-Increases Can Hurt!
Have you checked the credit limit being offered to you on your credit cards? If you haven’t, you should.
Most credit card companies issue cards with a certain credit limit based on your credit rating at the time of application. As time goes on, if your credit rating remains good and your payment history is positive, they will automatically increase your limit. While the company usually sends a “Congratulations, your excellent payment history has allowed us to increase your credit limit to $xxxx”, it doesn’t always. Sometimes you’ll just notice on your statement that the maximum you can charge on the card is higher than it was when you opened the account.
If you have one credit card which you use for any charge purchases or internet shopping, this credit limit increase will probably have little to no effect on your credit rating. Should you have several cards, with multiple companies and/or stores, unrequested increases in your credit limit can negatively impact your credit rating, thus reducing your credit scores. Why?
Part of the rating formula includes an assessment of how much credit you have available. If your credit score is 750 with $30,000 of available credit on a credit card(s), and you suddenly have available credit of $50,000, your score will likely drop. You don’t have to use the credit for it to decrease your score. You’re being rated on your potential to increase your unsecured debt.
Keeping a close eye on your credit card statements is the best way to ensure that your credit limit isn’t increased unnecessarily or that your APR isn’t changing. Increased APRs can also impact your credit rating. Introductory, or teaser, rates can result in one credit rating while an increase in that APR may result in a different rating, therefore, reducing your previously high score.
When it comes to credit cards—less is more! Have as few cards as possible, preferably only one. Make sure the limit is reasonable for your needs but not unnecessarily high. Don’t allow increases to this limit unless you really need and/or request it. For example, if you are planning a trip out of the country for an extended period, it may make sense to increase your limit just in case of an emergency. Once you return, however, request that the limit be reduced to its previous level.
Remember, you need to manage your credit rating along with your credit card(s) utilization, don’t let the creditor manage it for you!