We’re not talking about earning bonus rewards or extra perks— instead, credit card issuers reward cardholders for their on-time payments with a credit limit increase. It’s often automatic, and you may not be notified that it’s happening. But it’ll improve your credit score as long as all other factors remain the same. That means you shouldn’t start spending more or otherwise change your payment habits.
Here’s everything you need to know about an automatic credit limit increase, plus some tips on how to know when it’s time to upgrade to a better card.
What Is a Credit Limit?
“A credit limit is the maximum amount a card issuer has lent a cardholder once they’re approved for a credit card,” says Nathan Grant, senior credit industry analyst at Credit Card Insider, a credit card review site. In other words, it’s the most you’ll be able to charge on your card before you’re required to pay down the balance.
Your credit limit will have a significant effect on your credit score due to what’s known as your credit utilization ratio. That’s the percentage of your available credit that you are using at any given time and is calculated by dividing your total outstanding balance by your total credit limit. “Usually, the higher the credit limit, the better your credit score,” says Jessica Weaver, CFP, CDFA, CFS, and author of “Confessions of a Money Queen.” That’s because if your credit limit increases and your balance stays the same, you’ll be using a lower percentage of your available credit, which will positively impact your credit score.
Why Did Your Credit Limit Increase Automatically?
If you find that you’ve received a credit limit increase without having requested one, know that this is a common occurrence that will most likely help you, not hurt you.
“Sometimes issuers will automatically grant cardholders that are in good standing a higher credit limit,” says Grant. Weaver notes that credit card companies like to give credit limit increases to people who use their cards frequently but also make their payments on time. There are a few reasons your credit card issuer may have given you an increase:
- You’ve consistently made your payments on time
- You reported an income increase
- You’ve been a cardholder for a long time
Each issuer has different criteria for when an automatic credit limit increase will occur. But if it happens to you, you should pat yourself on the back for maintaining a positive payment history. With your new credit limit, you can enjoy more flexibility in spending with your credit card, and if you keep your balances the same as before, you’ll likely also see your credit score increase.
Do You Have to Spend More?
Your credit limit tells you how much you can spend, not how much you should spend. “Just because you have a higher credit limit doesn’t mean you should spend more. You have more spending power, but that doesn’t mean you should be racking up more debt,” says Grant. In fact, you should focus on keeping your balances low, ideally under 30% of your credit limit. However, Weaver adds, the higher credit limit “is there as a resource.” That means you could use it for an emergency expense or a one-time large purchase that you have a plan to pay off, instead of taking out a separate loan. However, having an emergency fund on hand or holding off on a large purchase until you can pay for it in cash is still preferable to carrying a balance on your card in these situations.
In general, though, “You should be able to pay off your credit card with the money that’s in your bank account,” Weaver says. That means you should have a budget and never spend more than you can afford to pay off during the grace period. If you start carrying a balance, it’ll negatively affect your credit utilization ratio, and high credit card APRs mean interest charges can quickly add up as well.
Will Your APR Change?
Your APR represents the total annual cost, including interest and fees, that you’ll pay to carry a balance on your card. Many credit card issuers charge penalty APRs, so if you miss a payment, you might see your APR increase. But an automatic credit limit increase should not have any effect on your APR. “Issuers will not change your APR because of that factor,” says Grant, who notes that you would need to negotiate with your issuer separately if you wanted to get a lower rate.
Can You Request a Higher Credit Limit?
Even if your issuer doesn’t offer automatic credit line increases, you might still want to request a higher credit limit if you’ve been making payments on time for a while or had an increase in your income. The process of requesting a higher credit limit varies by issuer. “Some cards will have a request link right in your online account or the app itself. Others might have you call customer service,” says Grant. It never hurts to try to get a higher limit, and if your credit card company approves the increase, you’ll likely see a boost to your credit score.
Some credit card issuers let you request a higher credit limit online. If you’ve made consistent, on-time payments for some time, or have seen an improvement in your credit score, give this option a try.
Are You Ready for a Card Upgrade?
An automatic credit limit increase is a sign of a consistent payment history. If you’ve also kept your debt balances low in addition to making on-time payments, then you may have seen your credit score improve over time. That means you could be ready for a better credit card if you started off with a student card or one designed for bad credit applicants. Weaver recommends a credit score of 700 as a good benchmark to aim for before applying for a rewards card.
If your current credit card doesn’t match up with your lifestyle, that’s another sign it’s time to apply for a new one. “If you’re starting to use your credit card more and more, you want to look at what the rewards are on the credit card,” says Weaver. Aim to choose a rewards credit card that offers rewards for the categories in which you spend the most. Also pay attention to other bonuses and perks, and choose the card you’ll get the most use out of. For example, if you’re planning a trip abroad, you may want a travel rewards card with no foreign transaction fees.
There’s no magic moment when you should apply for a new card, but you can continuously monitor your credit score and review available credit card offers. If you see your score rise above 700 and you find a card that offers more bang for your buck, it’s probably a good idea to apply. Just remember that even after you get a new card, you should probably still keep your old card open to benefit from the credit history on that account, unless the card charges an annual fee that’s no longer worth it.