Why do credit cards increase your limit? Sometimes banks will increase your limit proactively, without the card-holder even asking. Other times the lenders will increase card limits in response to a request from the cardholder.
The decision whether to increase your limit can be mysterious. Each lender has unique underwriting and business rules. But many basic practices are followed and may apply across the board such as:
- Why credit cards have limits
- Who qualifies for credit limit increases?
- Why banks proactively increase your limit
- When lenders increase your limit after being asked
Why Credit Cards have Limits
A credit card limit determines the total amount of charges that can be outstanding during any single billing period. You can continue placing charges on your card until you reach the limit amount. After that point, all future charges will be declined until you pay down a portion of the outstanding balance, and create an “open to buy” amount on your card.
Banks and credit card companies assign credit limits to protect themselves from losses. Rather than issue a small number of credit cards with very high limits, they prefer to issue a larger number of cards with relatively small limits. This helps diversify their risks.
When a credit card account defaults, the bank may lose the entire outstanding balance. Placing limits on credit card charges limits the exposure to loss.
Who Qualifies for Credit Limit Increases
The higher your credit limit, the greater the amount of loss to the bank or credit card company should you default on the loans. On the flip side, the greater the limit the more you may charge. This increases 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 an increase outweighs the increase in potential losses. They typically will look at two data sources: your credit report, and your behavior with your credit card account.
- Your credit report provides information about how you are handing debt with other lenders. This report is used when you originally apply for a card and on a periodic basis while you remain a cardholder.
- Your account behavior is visible only to the bank or credit-card company. They track the type of purchases you make, and the amount of interchange and interest revenues you generate.
Why Credit Cards Proactively Increase your Limit
Banks and credit card companies often increase your limit proactively. That means you get an increase without having to ask. Banks want to lend money to profitable cardholders, and keep profitable cardholders from borrowing from other lenders.
When you are first issued a credit card the bank has very limited information about you. They make an approval and credit limit decision based upon your credit report:
- Summary information about how you handle debt with other lenders
- Available to all lenders with a permissible purpose
Banks will often set lower limits on new accounts to protect themselves from losses until they get to know you better. As you use their credit card, they learn more about how you handle money. They gain valuable insight into your ability to manage credit. These data differ from credit reports in two ways:
- Detailed information about spending and repayment
- Proprietary data that is never shared with a credit bureau
Banks will often proactively increase credit card limits to gain a greater “share of wallet” for their most profitable credit card accounts. The higher the limit, the greater chance they can capture and control detailed information about you that is never shared.
The credit card that controls the greatest share of spending (has the highest limit), has a decided information advantage over any other card in your wallet.
When Lenders Increase Your Limit in Response to a Request
Card holders often seek a credit limit increase. They may have an upcoming need to borrow more, or make a major purchase and would like the added financial flexibility. Cardholders have two means to increase their credit card limit:
- Request an increase from their existing credit card(s)
- Open a new credit card account with another bank
When you call your credit card company to request an increase, the customer service person answering the phone knows you may have options. As addressed above, we know that banks often proactively increase limits, and have set a limit they feel comfortable with.
Your call to the bank is a signal that your spending and borrowing is about to change. Most people requesting increases have a reason for doing so. They either want to:
- Expand the balance they are paying interest on
- Make a large purchase
- Increase their spending levels
The customer service person has to decide whether to grant your request. Most banks anticipate that these calls will occur, and have a scoring system in place that gives their customer service representatives a cue about how to handle the call:
- Red: unprofitable account that does not warrant an increase
- Yellow: marginally profitable account that may warrant a small concession
- Green: profitable account worth trying to keep with a larger increase
That is my list of reasons why credit cards increase limits. Can you add any others?