You didn’t ask for it, but it happened anyway. Your credit card issuer increased your credit limit significantly, making extra funds available for you to borrow each month.
If this happened to you, you’re not alone. “I think we’ll see more of this now as credit opens up,” says Beverly Harzog, credit card expert and author of “The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free.” “Banks are trying to open up credit a little bit, so people who had trouble getting credit before might get more credit.”
This may also happen more frequently if you’re a newbie credit card holder who initially was only offered a very low credit limit, experts say. While the credit card companies don’t have to notify you of a credit limit increase, most will, says Bill Hardekopf, CEO of the credit card-comparison website LowCards.com.
But what does a credit line boost mean for your spending plan? Is it good news or bad news for your credit score? Read on for advice on how to manage an unexpected credit limit increase.
[Read: Debt Repayment Guide: Everything You Need to Know About Repaying Loans.]
First, pat yourself on the back. While it’s impossible to know the exact behind-the-scenes calculations the credit card issuer used to determine that you were eligible for a higher credit limit, the increase typically points to a healthy credit history on your end. Your issuer usually won’t raise your limit unless you appear to be good at repaying your debts, experts say. “It’s a sign of something good,” Hardekopf says.
So give yourself a round of applause. You’ve been handling your credit well so far. If you continue to spend and borrow responsibly, this shouldn’t be a problem.
[See: 8 Financial Steps to Take After Paying Off a Debt.]
But don’t go on a spending binge. An increase in your credit limit should not impact your budget at all, experts say. Just because you’re allowed to borrow more each month doesn’t mean you should readjust your spending plan to regularly max out your newly increased credit card limit. “I do think a certain percentage of people do go out and spend more, thinking, ‘Hey, our credit limit has increased. We can spend more,'” Hardekopf says. “And that’s not what it means.”
Harzog agrees. “This is not like a raise,” she says.
Continue budgeting as you had before. You still want to keep your spending low enough that you can repay your credit card bill each month. If you overspend and fail to repay, you’ll shell out more money in interest each month. “You should only spend more if you can afford to pay it off, in full, on time, every month,” Hardekopf says.
Improve your credit score. Another reason to keep your spending low: It will improve your credit score. A higher credit limit can help you keep your credit utilization — the percentage of available credit you use — lower. And that’s good news for your credit score.
Credit bureaus see consumers who have access to a large credit — but don’t use it — as better credit risks. In fact, credit utilization, also called “amounts owed,” makes up 30 percent of your FICO credit score. You want to keep your credit utilization below 30 percent to maintain a healthy credit score. Keeping it under 10 percent is even better, expert say.
[See: 10 Big Ways to Boost Your Budget — Without Skimping on Your Daily Latte.]
You can achieve this on your own. If you can handle the responsibility, and you’d like to score a higher credit card limit to improve your credit utilization ratio, you can take control of the process.
It doesn’t hurt to call your credit card issuer and ask for a credit increase or complete a request online, experts say. “There is absolutely no harm in asking,” Hardekopf says. You may also apply for a new credit card to boost your limit. While the application may result in a hard credit inquiry on your credit report (an unrequested increase shouldn’t), which will have a temporary negative impact on your credit score, the long-term benefits of maintaining a low credit utilization will outweigh the short-term dip.
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Why Did My Credit Card Limit Increase? originally appeared on usnews.com
