You’ve been working hard to manage your money, stick to your budget and pay your credit card bills on time. As you prepare your budget for the upcoming month, you receive a notification from your credit card issuer that your credit line has been increased. So what is a credit line increase and what does it mean for you?
What is a credit line increase?
Nearly all credit cards come with a preset limit, also known as a credit line. The credit line is the maximum balance you can use on your credit card. Once you’ve reached that limit, you won’t be able to use your credit card until you pay down your balance.
When a credit card issuer accepts your application for a credit card, they will provide you with an initial line of credit. Every credit card company uses their own policies to determine what your limit will be, but they generally look at a variety of factors related to your creditworthiness and your ability-to-pay the amount of the credit.
When your bank or credit card company increases your credit limit, it simply means they’ve upped the amount of money you can borrow from your credit card.
What are the benefits of a credit line increase?
Getting a credit line increase can actually benefit your credit utilization ratio. The credit utilization ratio is how much you currently owe on all of your credit cards divided by your total credit limit.
So if you have one credit card with a $1,000 limit and you carry a balance of $400, your credit utilization rate is 40%. If your credit limit increases to $2,000 and you carry that same $400 balance, your credit utilization ratio drops to 20%, which can positively affect your credit score.
Another benefit of getting a credit line increase is that it allows you to have more credit available.
A Word of Caution
If you’ve recently received a credit line increase, you should feel good about yourself and your credit practices. But it also comes with a word of caution. That is, a credit line increase is not a pay raise. And you will still need to pay off whatever money you charge to your credit card. So, regardless of your credit limit, it’s always a good idea to stick to a budget and make sure you’re spending less than you earn.