Gotten an Unexpected Credit Line Increase Lately?

Have you checked your credit line on your credit cards lately?  If not, you may have missed an unexpected, even unrequested, increase in your available credit.   But, before you rush out and use that extra available credit, you might want to reconsider. 

Credit CardsIn the last few months, without much fanfare, many banks have begun automatic credit limit increases for customers who are near or at their credit limit.   These “Proactive credit line increases” (PCLIs) were very common prior to the 2008 credit crisis, and infact, post-crisis rules essentially stopped the practice of increasing credit limits without customers requesting the increase.

However, since credit cards are among the most profitable loans originating in the finance industry, and with interest rates at a 20 year peak, banks have begun to find loopholes in regulations, allowing them to issue these proactive credit line increases to those consumers already carrying high levels of debt.

And why is that?  It’s all about the money.  Last year, US banks made approximately $179,000,000,000.00 (yes, that is billions) from credit card interest and credit card fees.  This year, that number is expected to be even better for banks!  Of course, that’s not so great for consumers!  Credit card debt levels are the fastest growing form of debt in our country, currently at a record high ($880,000,000,000.00 as of September, 2019), and that number will only continue to rise as people go out and utilize those credit line “surprises” that arrive with their monthly statement.

Unfortunately, many of these PCLI’s are in the subprime credit sector, where companies are extending additional credit to those who may already be overburdened by debt, who may miss payments, who may incur high penalties, etc.  All of which are extremely profitable for banks.  In fact, the number of people aged 19-29 in the USA who are more than 90 days late on their card payments just reached a ten-year high.

What should you do?  While that little surprise credit line increase may tempt you to go on a shopping spree or two, your best bet is to do nothing.  That’s right, don’t do anything.  Don’t spend it.  Don’t reject it.  Just continue on your normal budgetary path and keep trying to pay those balances down.  Remember, the ideal situation to be in is to keep your credit card balances to an absolute minimum, and then pay them off every month (or as quickly as possible).

Do Your Credit Cards Work for You?

Do your credit cards actually work for you or against you? I know that sounds strange, but when you think about credit as a whole, your credit score either helps you or hurts you. Likewise, the credit cards you carry can either help or hurt you, too.

For example, your credit might be pretty good, but if you don’t have enough credit available, it can damage your credit score. You see, your credit score is calculated based on a number of variables, one of those being how much credit you have available. And if you don’t have enough, it can hurt your score. So, while you might be limiting your credit card use, if you’re still over the recommended 30% utilization, then you probably don’t have enough credit.

But how do you know if you have enough credit? One of the best ways is to look at how much credit other people in your credit range have. And that’s pretty easy to do with all of the free credit tools available these days. Almost every one of the free sites offers a comparison of your credit versus others in your credit range, all you have to do is log in and look. Then, once you’ve figured out whether you have the right amount of credit, you’ll want to take a look at the actual credit cards you have in your wallet.

Do they offer a decent interest rate for your credit score? If it’s been awhile since you’ve taken a look at your interest rates, or if your credit score has improved since you last looked, you might want to take a good hard look because you could be paying more interest than you should.

Do you have any rewards credit cards? Are the rewards that you’re getting the right rewards for you? Would a cash back card be better or should you get a travel rewards card? It all depends on your lifestyle. What works best for someone else may not be the best choice for you.

Remember, your credit should fit your needs, and it should work for you, improving your overall financial picture. Your credit should not hold you back, keeping you from doing or having the things that you want or need to make your life the best that it can be. So, if you haven’t examined your credit cards lately, there’s no better time than the present!

Available Credit

You know, as weird as this is going to seem, the fact that you actually USE a credit card occasionally can affect your credit score!

Let’s just say that you needed to buy a new computer because the old one blew up… so, rather than take the funds out of savings, you take advantage of a deal where you can get 0% financing if you pay within six months or a year.  That sounds pretty good, right?  Yes, it does.  So, you go ahead, order the computer that you need, and you use the credit card that offers you the 0% financing deal, planning to pay it off within the terms that you’re given.  All is good, right?

Well, maybe not… a couple of weeks after you buy your computer, you get an alert saying your credit score has dropped 10, 15, or even 20 points!  And that’s not so good, is it?   Kind of makes you think twice about using those cards at all, doesn’t it?

So, why did your credit score drop when you actually used that credit card?

Well, you see, not only is your credit score based on your payment history, but it’s also based on how much credit you have available at any one time.  And if you use a credit card, it can reduce your “available credit,” causing your credit score to drop… and if your available credit is teetering on less than the 65 or 70% the credit bureaus like to see?  Then you could see a significant change in your credit score.

What can you do to prevent your score from dropping and/or can you fix it after you’ve seen a drop in your credit score due to a reduction in available credit?

There are really two ways to fix this problem.  The first, and most obvious, is to simply pay down the credit card that you used to make the purchase/purchases in the first place.  Typically, once you’ve done that, your score will bounce back very quickly.   Or you can simply increase the amount of available credit that you have by requesting a credit line increase or getting another credit card with a large enough credit limit to offset the balance that you are carrying on your current credit cards.

Either way you choose to go, the key to maintaining your credit score is to make sure you keep your available credit at or above 70% of your total credit line (all combined accounts).

Don’t Cut Up Your Credit Cards!

Thinking about cutting up your credit cards?  Closing credit card accounts that you are not using?  Before you do either one of these things, you may want to think twice!

Let’s face it, at one time or another, we have all run up a credit card bill that seemed to take forever to pay off… and then, when it was paid off?  Your first thought might be to cut up the card or close the account so you won’t be tempted to run that bill up that high ever again… Don’t do it!  At least, don’t do it without looking at the effect that closing a credit card account could have on your total financial picture.

And by your total financial picture, I mean your credit score!  That’s right, closing a credit card account can really affect your credit score, and not in a good way!

When you close a credit card account, you are essentially doing two things:

  1. When you pay the balance in full, the credit utilization rate on the card will then be 0%, meaning that you are using none of the available credit on the card.  This 0% credit utilization actually offsets the balances that you may be carrying on other cards, so if you’ve got two credit cards, one with a 75% credit utilization and one with a 0% utilization rate, and you close the one with the 0% utilization rate, you will actually lower your total available credit.  Your credit utilization rate will then be 75%, and that’s not good for your credit score at all.  Remember, your credit utilization is based on how much of your total available credit you are using… if you suddenly remove a portion of your total available credit, it can really affect your credit score.
  2. When you close a credit card account, especially one that you’ve had for a long time, you could actually shave years of good payments off your credit history.  Lenders like to see a longer payment history, closing an account could remove some of that history from your credit report.

What should you do instead of closing a credit card?

First and foremost, you should look at any annual or monthly fees that you may incur just for having the account… if there are fees, and you don’t need the info on your credit report to maintain a good credit score, then by all means close the account, or even consider closing one account and opening one with another credit card provider who won’t charge any fees.  You might even qualify for a lower interest rate!

But, on the other hand, if you do need the info on your credit report, and there are little or no costs associated with keeping the account open, then keep the credit card.  Just be sure that you put the card away so you aren’t tempted to make any impulsive purchases!

Keep the balance low and keep your credit score high!