You just received your credit card’s billing statement and you were surprised that your credit limit just increased, without you even requesting for one. Is it a pleasant surprise or is this just a ploy to get you to spend more? You don’t have to worry about your credit limit increase because you’re not alone. While it doesn’t happen to just every one, it does certainly happen.
If you’re a newbie credit card holder and was initially offered a low credit limit, then the increase was bound to happen eventually, especially if you’ve proven to be a reliable handler of credit and you have a healthy credit history. According to CEO of credit card comparison website LowCards.com Bill Hardekopf, although companies are not obligated to inform you about any increase, most will.
But what does an increased credit limit mean in terms of your budget? Should you change your spending habits because you have more available credit to use? Is this a license to binge?
It’s Not a Raise
An increase in credit card limit, for most people, would mean spending more because more credit has been made available. While the lender did technically “raise” your credit limit, it shouldn’t be considered a pay raise because it really isn’t one.
What a credit limit increase means is that lenders trust you with more credit and that you can borrow more money because they are confident in your ability to pay back what you owe. However, just because you have the ability to spend more doesn’t mean you should do it.
Don’t Go Spending It All
Experts say that an increase in your credit limit should not make an impact on your budget at all. An increased credit limit does not mean an increase in your income and should still be treated as potential debt. Continue following your old budget and keep your spending low enough that you can repay your credit card bill in full each month.
Increase Your Credit Score
An increase in your credit limit means an increase in your available credit. This means that if you continue to keep your spending low, the percentage of your available credit will be high, and will keep your credit utilization rate low. That’s good news for your credit score as credit utilization makes up 30% of your credit score. Maintaining a credit utilization rate of 30% or less will guarantee that you have a healthy credit history and you will have a high credit score.