Learn Why You Should Never Raise Your Credit Card Limit
December 13, 2019
Have you ever got mail from your credit card company asking you if you wanted to raise your credit limit on your credit card?
If you have a credit card, you will either have gotten mail or will get one eventually from your credit card company.
I first received my credit card when I was 18. The credit limit on the card was only $500. Needless to say, I maxed out this credit card easily on basic college purchases. As a matter of fact, the credit limit was so low I could only buy books for two of the four classes I was taking!
So imagine, me, the first quarter in college. Excited and nervous for a new experience, trying to buy books – only to have my card rejected. It was so embarrassing!
You bet I increased the credit limit the first time a credit limit increase was offered!
However, since then I have increased my credit limit less than three times despite numerous emails and letters from the credit card companies I use encouraging me to do so. So why?
While there are some positives to increasing your credit limit, there are many more potential drawbacks to increasing your credit limit.
What is a credit limit/credit card limit?
Your credit limit is the maximum amount of money that your credit card company allows you to spend.
Once you reach the credit limit, you are not allowed to spend any more money on your credit card unless you pay back the money you have loaned.
How can my credit limit change?
Your credit limit can change by any of the factors above. Generally speaking, most of those factors are used to help determine what your credit limit when you submit your application.
Once you receive a credit card, it is rare that your credit limit will go down. That isn’t to say it isn’t impossible for your credit limit to go down.
Situations as continual late payments or major decreases in credit score can cause your credit limit to decrease.
It is more common to see credit limit increases.
Credit limits can be increased automatically or by you contacting your credit card company. The two largest factors to credit limit increases are credit scores and salary are the two largest factors.
Why are credit limits in place?
Credit limits are designed to help protect the credit card company and, to a small extent, protect you from yourself.
Algorithms by credit card companies determine how likely someone will pay back money they charge on a credit card.
For instance, let’s say someone makes $40,000 with good credit, no debt, and lives in an apartment. That person’s credit limit is likely around $10,000. This is because the credit card company’s algorithm can determine more or less after accounting for taxes and housing that a person has about a spare $10,000 to use.
While each company’s algorithm might be slightly different causing slight differences in credit limit offers, the overall concept is the same.
The secondary purpose is to make sure you don’t outpace yourself in spending. Assuming you make $40,000, you will likely be able to pay the money in time.
What are the positives to increasing a credit limit?
Your credit score might see a slight bump after several months of increased credit. Credit scores are determined by how much available debt to how much credit you have.
The major positive of increasing your credit limit is it increases your ability to spend or your spending power.
If you have $1000 increase in your credit limit, then it increases your ability to spend by $1000.
Why you shouldn’t increase your credit limit in most cases.
It increases your chance of getting into debt
Credit card companies make money through two methods. The first is through transaction fees that they take from the store you use your credit card at. The second method is by having people pay for interest on the debt they have put on the credit card.
Remember the algorithms to determine your credit limit? Think of the credit card company’s algorithms as a calculation that determines how much within an inch of a financial bankruptcy they can take you and still make a profit.
You should never think of your credit limit as how much you can spend.
Your credit card should only be seen as a place holder for the money you have. Many Americans are stuck in a perpetual cycle of debt because they see their credit limit as an extension of the money they have.
As a matter of fact, if you are the type of person who has been in credit card debt within the last 5 years, I would highly suggest avoiding getting any credit cards.
It increases your personal risk for fraud
Imagine you’re out shopping and you swipe your credit card with it’s $20,000 credit limit. It’s the credit card account you share with your ex.
You swipe and you realize your card is revoked because your idiot ex has run the card up to it’s credit limit.
So you call your credit card company and explain that your card was stolen because you share the account with your ex. All good, you don’t need to pay right?
Even though your credit card was “stolen” you are on the hook with for $20,000 in debt and you only make $40,000 each year. Good luck paying it off by yourself.
There are very few situations where you should increase your credit limit. However, often it’s better to not increase your credit limit.
When it comes to financial discipline and preventing yourself from spending, credit cards are insanely hard to control. It takes a person who has had practice watching their finances to not outspend themselves using a credit card. For this reason alone, you should avoid raising your credit limit.
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