You just got a raise at work and are picking out paint chips and framed posters for the corner office. So why hasn't your lender rewarded your new six-figure status with an increased credit limit? Or perhaps your family relocated and you were forced to take a lower-paying job. Surprised to receive a breathless announcement from your credit card company adding $2,000 to your spending limit?
Credit increases -- or the lack of them -- catch many cardholders off guard. That's because lenders base spending limits on factors that may not be obvious to the average cardholder.
In the above scenarios, you might assume that an increase in income would excite your lender. Not so. Your income is not on your credit report. The only time it does appear on the document is when you or your lender add it -- and lenders rarely do. (Here's a quick credit report anatomy lesson.) Therefore, income becomes an unreliable (and possibly out-of-date) data point.
That's not such a bad thing, says Joel Corley, a regular contributor on the Consumer Credit/Credit Cards discussion board. "Your income probably isn't a very good measure of whether or not you're a deadbeat," he told me in a recent credit card conversation. "Not all individuals manage the same debt loads equally well. It depends on where the individual lives, what they consider to be necessary expenditures, and most importantly, how disciplined they are."
It's how you handle credit that counts. While you might be the Big Cheese at the office, if you stink at paying your bills on time, banks aren't going to give you the keys to executive spending limits. On the other hand, if you are Mr. or Ms. Fiscal Responsibility but earn less than the guy in the next cubicle, you can count on several upgrades to your card. Those trying to improve their debt-to-available-credit ratio (an important measure of creditworthiness) may even benefit from increased spending limits.
Still, those increases are not always what they're cracked up to be. There's a fine balance between the "right" number of open lines of credit and what lenders deem too many and too risky. (Only 1% of the population has a perfect credit score. Here's how to become a perfect "10" to your banker.) And access to more cash can be a burden.
Before you celebrate more room to spend on your cards, ask yourself:
Will the temptation be too much? Some mistake their credit limit for their budget... and that's OK with some credit card companies. They'll happily give you three to five times as much spending room as you'd ever really need. Remember, your lender makes more money when you take your time paying off your balance. You set your spending limits, not your bank.
Does my score really need a boost? Are you planning to enter a loan situation in the near future where your credit record will be scrutinized? If so, there may be a better way to improve your credit score (e.g., removing inaccurate information, settling an old debt).
Am I paying for something I'm not going to use? Annual fees are becoming rarer every year (with the exception of some rewards cards). If you don't use the account, it's probably not worth it to pay to play -- or spend money for a small credit bump.
Will it give me peace of mind? Unused lines of credit can offer some security against emergencies, such as job loss, a major fender bender, or a tummy tuck. If it helps you sleep at night knowing that you could cover a large unexpected bill, go ahead and write a thank-you note to your lender. Then put your cards in the closet right next to the other thoughtful but rarely used gifts you've received.