18 – When Should You Accept a Credit Limit Increase

Wayne  0:04  

Well welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from right across Canada. I’m Wayne Kay and in today’s show we’ve got a fascinating topic about credit cards. Should you accept the limits and learning the inside scoop when it comes to these credit cards. 

To help us out about this – Francyne Myers joining me from Allan Marshall & Associates over in Nova Scotia – two offices there, Halifax and Truro. 

Francine, thank you very much for being here.

Francyne Myers  0:34  

Oh, you’re welcome Wayne, a pleasure.

Wayne  0:35  

I look forward to learning about credit cards, because I have so many questions. Everybody’s offering me credit cards, and all of them want to increase my limits. And I never quite know what to do. So we got a lot to discuss.

Francyne Myers  0:50  

And it’s not just credit cards that will increase your limits, it’s lines of credit – anything that we call revolving credit. That’s where you are making different payments every month, and you’ll have different balances. But typically, yes, you’re absolutely right, it comes from credit cards. 

So the first thing I always think of is, Why does this credit card want to increase my limit? Well, I think it’s because they want me to increase my spending. And why do they want me to increase my spending? Is it because they want me to, they want to make more money, because that’s how they make their money. Now, keep in mind that this is maybe a bit of a strange phenomenon. You’ll have to forgive me if I play amateur psychologist here.  A lot of times, and I have been doing this for 30 years – so I talked to a lot of people, right? 

 

A lot of people equate their self worth as a person with their credit worthiness. And really the two of them don’t have anything to do with each other. They really, really don’t. You’re still a great person, whether you have a crappy credit score or not.  

Wayne  2:04  

Okay. 

Francyne Myers  2:04  

But I do think that credit card companies, not only do they want to make more money on us, but they do kind of play on this. Congratulations, it’s like you won the lotto. 

Wayne  2:16  

Yes. 

Francyne Myers  2:16  

Congratulations Wayne, you’ve been approved for an increase. Which means, you’ve been approved to make us more money. 

Wayne  2:29  

Oh, I thought it was – you’re a great guy. We’ve heard from a lot of people, you come into the bank, you’re always smiling. You’re a great guy. We just want to give you more money as a bonus.

Francyne Myers  2:37  

Well, that’s it. It’s like you won the lotto.

Wayne  2:40  

Okay, so it’s not like that. So it’s more your way, as you were saying. We want to give you more money, spend more, hopefully get caught up in that hole of not being able to pay it off so that you’re paying more interest.

Francyne Myers  2:52  

Yes, but here’s the interesting thing. Sometimes a credit limit increase may actually be something strategically that you can use to your advantage. How’s that for being serious? 

Wayne  3:08  

I like this. Okay. 

Francyne Myers  3:09  

It depends on the circumstances. And it depends where you are with your credit card. So if you have been having issues with your credit score, and I have no problems with that but I always hesitate saying this because I say this with fear and trepidation. 

It can almost be a help if you just increase your score, because simple math. What can bring down your credit score? Well, if you have over 30%, you’re running more than 30% of your limit. If you have a $1,000 credit card, and you’re running $500 – $600 balance, and you can’t seem to get it down – it’s messing up your credit score. Those three digits between 300 and 900.  

If they come back to say, hey, we’re offering you a credit limit increase. Well, you know what, the math looks better. If you increase your limit, you will then bring down your percentage of the limit. It’s great math. Let’s say you increase it to $2,000. Well, $500 of $2,000 is now 25%. 

Wayne  4:31  

Yes. 

Francyne Myers  4:32  

You haven’t done anything. But you’ve actually possibly increased your credit score next month. All of a sudden you’re under that 30% limit. 

That’s a slippery slope. Okay, to do that –  if you need that quick fix of increasing your credit score, that will do it. But be very careful and be very, very disciplined.  

Wayne  5:02  

Yes. 

Francyne Myers  5:02  

Don’t start increasing your credit, because you’re going to find yourself in worse trouble than you were before.

Wayne  5:11  

And that’s what they’re playing on. That’s what they’re hoping for, I would assume.

Francyne Myers  5:15  

They are. So I wouldn’t recommend that except when you really need to do that to increase your credit score for perhaps some other reason. Even let’s say, you’re applying for a car loan and your credit score is not that great. You bring the score up, and all of a sudden, you get a percentage point off something. Then that may actually be worth it. 

Keep in mind, though, a credit limit can also equal a credit decrease. So if you’re going to do that, qualify for the credit you’re going for and then bring your limit down. Because you can also decrease your credit limit, it doesn’t always have to go up.

Wayne  6:01  

Now is that a bad thing to do? Is it a negative on your credit score, when you knock down the amount you have on your card?

Francyne Myers  6:09  

It would only be if, because of the math, go higher than 30% of the limit. So let’s say you were trying to pay off that credit card and you thought, I’m going to start bringing it down as I’m paying it down. Okay, which is actually a good strategy. But you will maybe experience a credit score decrease, until you bring the balance down. 

So again, we’re talking hard numbers. Let’s say you have a $1,000 credit card, and your balance is $300. You’re working hard to get that down, and you don’t want to be tempted to go any higher up. So you bring the limit down to $500, or even $300, because then you can’t put anything more on it. All of a sudden, you’re at either 60% or 100% of your limit. It doesn’t matter that the limit is only $500. The algorithm that the credit bureaus use to start calculating that three digit credit score will say, hey, whoa, she’s at 60% of her credit limit. She can’t pay her bills. It doesn’t matter that it’s a $500 limit. So you have to be aware of what that. 

Wayne  7:32  

Yes. 

Francyne Myers  7:33  

Here’s another kind of interesting thing. A bank, even though your score may start to fall a little bit because of that – a bank who’s a real person looking at it, will be able to assess that and see what’s happening. So you might actually qualify for a better rate. They say, Oh, she’s only got a $500 limit and it is at $300. Oh, that’s not a problem. 

Wayne  7:54  

Yes. 

Francyne Myers  7:54  

But your score will drop. Then a bank may be more likely to lend you money because you’re not overextended.

Wayne  8:01  

Okay, so it does. And this is, as you said, this is not just for credit cards. It could also be for a line of credit, people have a line of credit. In fact, I can use my son as an example. He actually doesn’t have a car loan, he doesn’t have a mortgage, but he’s really good with making sure that all his credit card bills are taken care of. And they just offered him a beautiful line of credit. To which we said, Yes, I think you should go with getting that line of credit. Just for credit building. What do you think?

Francyne Myers  8:33  

Does he really need it? That is the question though.

Wayne  8:38  

Well, he’s looking at buying another car. And so yes, just maybe.

Francyne Myers  8:43  

Yes, so there’s a good example of using that strategically. And if he can qualify for that line of credit at a very good interest rate, that may be better for him to make a larger purchase on that line of credit – than actually going to finance that car. So it’s all kind of strategic. It sounds like he’s handling his money well. Make sure with revolving credit, you make that payment, you discipline yourself and say, Okay, that’s a car payment.

Wayne  9:21  

Oh, yes. 

Francyne Myers  9:23  

That’s every month I’m putting $300 away. Now, not just the minimum payments. So if you can do that – it comes down to strategy and discipline. 

Wayne  9:34  

Okay, good. When should you not accept a credit limit increase?

Francyne Myers  9:42  

When you don’t need it – for any reason. If you don’t need it to bring your credit score up, or to make a strategic purchase and then pay it off – there’s really no reason why you need to increase your credit card if you don’t need the extra credit. 

Wayne  10:03  

Okay

Francyne Myers  10:04  

There really shouldn’t be. And I always say, when you apply for that credit card, you usually settle for a certain amount of the limit. If you’re to the point where you’re getting close to that limit, and you’re going to need it, because you need more credit, then it’s time to maybe step back. 

Because when people come to see me, Wayne, and I do Bankruptcies and settlements with creditors and things like that – people don’t, when they come to me – they didn’t get that first credit card thinking they were going to end up in Bankruptcy. This happened very slowly, increase upon increase upon increase. I’ll get this increase. It’s only a few $100 or $500. And I’ll use it as an emergency fund – which, incidentally, is probably not the best practice. Because if you didn’t have the money this month, you probably won’t have it next month. But when you really don’t need it, and they’re just giving it to you, and it feels good, because it does feel like a reward – don’t get it.

Wayne  11:16  

Okay. Good to know. And when we talk about what effect a credit limit increase has on your chances at the bank, what does that look like? Is this negative or positive?

Francyne Myers  11:31  

Depends again on so many factors. Now, keep in mind when you get a credit limit increase it doesn’t mean you have to go right up to your limit.  Like you said – all it means is you have more credit available to you.

So it could be positive, because it shows that you can actually handle the credit in that you’re not living near your limit all the time. Yes, the thing to remember, though – here’s what a bank will look at. You have a $10,000 line of credit. You have nothing on it. But tomorrow, you could. So they’re going to look at not only what your balances are, they’re also going to look at what you have available to you.

Wayne  12:23  

That’s shocking to me that they would look at it and say, hey, you’ve been great with this whole line of credit – but you could possibly rack it right up.

Francyne Myers  12:37  

You have too much credit available to you.

Wayne  12:44  

Okay, it’s the banks fault, because they keep increasing everything. They keep putting everything up there. They’re the ones giving it. It’s not like, as we talked about my son, it’s not like he went after the banks and said, Hey, can I have a line of credit? They said, Hey, you’re doing great. Here’s a line of credit. Oh, and let’s increase your credit card. 

And you know, they’ve done that to so many people, everything gets increased, increased increase. And then eventually, I’ve never been anywhere near what the credit limit was, but once upon a time – and that took a long time to get rid of. 

Then I learned a lesson very, very quickly when I was young, about playing with those credit cards. And thankful I did because I was able to make sure that never happened again. But you know, you have a credit card that’s way up there. And I just think well, this is crazy. I would never spend that much money on a credit card unless I was buying a kitchen or something.

Francyne Myers  13:35  

Yes. And then it’s sometimes, like you say, it’s a short term finance or what have you, and you would have a strategy to pay it off. Yes. It’s so easy to say sure, I’ll take a credit limit increase. Because what happens a lot of times is people are using their credit cards as that extra emergency fund – when the dog gets sick, or the brakes go or the normal things that happen to all of us, but they haven’t built it into their normal budget.

Wayne  14:07  

But, Francyne, what about this one? I go to a store. I’m going to go pick up something. I go to the store and they say, would you like one of our credit cards and we’ll give you 20% off your purchase.

Francyne Myers  14:20  

Got a good story for you.

Wayne  14:22  

Good because I feel bad. I say no, I’d rather pay full price and not take your credit card. But I don’t know. Yes, interesting. 

Francyne Myers  14:29  

Here’s where you might, you could do that. But I’ll tell you the story. I had a friend. He was a Leafs fan. And that’s sad enough in itself. This isn’t a sad story. It’s actually a funny story. 

Wayne  14:40  

Okay.

Francyne Myers  14:41  

He would go to all these Leaf’s game games. And they would have these same kinds of things. Hey, do you want to apply for a credit card? You’ll get a prize or this gift. He’d say, Yeah, sure. 

So he’d apply for all these credit cards. When they came in he would just cancel them. Sounds like a great thing. And the meantime you got a tablet you got this, you got that. So he went to apply for a car. This is a true story. He went to apply for a car, they turned him down because his credit scores are too low. And he’s like, what is that? Because you’ve applied for too much credit. 

Wayne  15:11  

Oh.

Francyne Myers  15:13  

So here’s the thing. He didn’t have the credit cards anymore. But every time he went to a game, there was a hit on his credit score. So, that’s one of the things that will bring your credit score down, 

Wayne  15:26  

Okay.

Francyne Myers  15:27  

People applying for credit, whether you get it or not, whether you still have it or not, or whether you’ve paid it off, it’s irrelevant. They say probably no more than six a year, okay, then it’ll start to have a real hit against your credit score. You are way over. 

So why, if you go to the store, and they’ll give you 20% off, and they give you this card – if you don’t have any other hits against or maybe you have a couple, sure get your 20% off, get the card canceled, it shouldn’t really affect you. 

But keep in mind, every time there’s a hit, and I’m talking about hard hits, I’m not talking about you checking your credit score. I’m talking about actually, somebody’s going to look for credit purposes, but that will bring your score down. So be careful about doing that. Because it can have a negative effect.

Wayne  16:22  

Well, every store has it and then they give you points. And I mean, it’s become a brilliant marketing campaign for almost every company to now have their own credit cards – where they’re making their own percentage. In fact, I’m going to start a Wayne credit card. And I could just charge 15%. And I would do great.

Francyne Myers  16:41  

And I think you should. Here’s the thing about that – decide what is the best. If you’re going to have a credit card as most of us do – decide what is more important to you and stick with that card. 

Do you like to travel? Get an air travel points card. Do you like to eat, such as myself, get one where you can get points at a grocery store. There really are credit cards that will give you an advantage depending on what’s important to you. And I think that’s kind of key. And also, how much are they charging you per year for the privilege of using their credit card? 

Wayne  17:24  

Okay, that’s a good one as well. What’s your overall recommendation on credit card limit increases?

Francyne Myers  17:31  

Very limited circumstances you should be doing it because it is such a slippery slope. It has to be a short term strategy that will give you an advantage, not just because they offered it to you. And that sounds good.

Wayne  17:49  

I’ve talked with a lot of people about money and cards and finance. And I’ve never heard somebody talk as much about strategy with something like a credit card before and a line of credit. And so I really appreciate the way you look at this, and how you shared it with us. 

Francyne Myers  18:07  

Yes, thanks. Wayne. 

Wayne  18:08  

It’s a pretty interesting topic when it comes to credit, especially because you see what happens. And it’s so simple, you just go up and use your credit card a little bit more than you’ve usually done. And then all of a sudden, something like, well, any of the plethora of things that we’ve had happened in the last two years, comes along, knocks you off your feet just a little bit. And all of a sudden you can’t make those payments. And as you said, slippery slope. Boy, we’ve got a lot of Canadians who have been on a slippery slope in the last couple of years. 

Francyne Myers  18:37  

Yes, we certainly have. 

Wayne  18:38  

All right, you’ll be back again to talk about debt and how to get out of it for Canadians and I really appreciate your time today, Francyne. 

Francyne Myers  18:46  

Thanks. It was a pleasure. 

Wayne  18:47  

Yes, my guest today Francyne Myers. If you want to learn more, if you want to have a free consultation with Allan Marshall & Associates you can contact wecanhelp.ca. 

And that’s it for this Debt Matters podcast. If you want to subscribe please do – wherever you get your favorite podcast from. And of course for more information, you can always check out debtmatters.ca Thanks very much for listening.