One of the most common questions we get from readers relates to how card issuers decide when to give you a credit limit increase or decrease. The answer can be broken down into two key points, we’re going to discuss why card issuers do this in a bit more detail as well:
- When you’re not utilizing your current credit limit (e.g have a balance of $0 or close to $0) your credit limit will stay the same
- When you’re utilizing your credit limit, but not using near 100% your credit limit is increased
- When your utilizing close to 100% of your credit limit, it may be decreased
It’s important to remember that banks and credit card issuers have one main goal and that’s to make profit. This means they need to manage both their risk and reward to end up with the most profit in their coffers. They make money in main ways: credit card processing fees (which merchants have to pay. Typically 1-3% depending on the card processor) and interest/fees. Their profits are decreased whenever they have a card holder who doesn’t pay their debt back and becomes delinquent or when credit card fraud occurs. This is a massive oversimplification but it’s useful to keep in the back of your mind to understand why card issuers will change your credit limit
When you don’t use your card (e.g have a credit utilization of 0%) a card issuer isn’t making much money (if any), they aren’t earning any money from card processing fees because the card isn’t being used and they aren’t making any money from you carrying a balance because you don’t have a balance. This means that they are receiving very little reward. On the flip side, they are also exposed to very little risk as there isn’t any chance of you becoming delinquent with your payments as you’re not making any. The only risk is that of card fraud and this is recoverable by the card issuer in most cases. Because of this they’ll either keep your limit at the same level or very occasionally reduce it.
When you use your card a lot, the credit card issuer is able to make a lot of money. They’ll make money from the card processing fees and if you don’t pay your statement in full they’ll also make money from the high interest rates they’ll charge. This represents a high reward for them, as such they might issue you with a credit limit increase to encourage you to keep spending and further increase their profits.
They still have to worry about risk, but the reward is high enough that they can afford to have some card holders become delinquent and they’ll still make enough profit. This risk profile changes when you start approaching the maximum of your credit limit. This is because card holders that are utilizing almost all of their credit limit are more likely to become delinquent than those who aren’t. As such credit limits must be reduce to prevent too large a loss.
Image Courtesy of Barclay Ring Blog
