If your bank has ever given you a credit limit increase on your credit card without your request, it’s not because it’s being nice. New research shows that credit limit increases initiated by banks may be a driving factor behind higher household balances.
Limits Rise for Those Already in Debt
According to the Automated Credit Limit Increases and Consumer Welfare study from King’s Business School and the Federal Reserve Board, four in five credit card limit increases were initiated by banks, not consumers. And most of those limit increases were given to consumers already carrying a balance.
These automatic increases account for more than $40 billion in additional available credit every quarter. And consumers are using that credit. According to the paper, revolving balances rise by around 30% following these limit increases.
About one-third of all unpaid credit card balances in the United States — the amounts consumers carry from month to month — exist only because of credit limit increases made after the card was opened. And that figure actually rises to 60% among borrowers with lower credit scores.
It’s worth noting that in the United Kingdom and Canada, banks are not allowed to raise credit limits without consumer consent. The authors of the paper believe adding similar safeguards in the U.S. could help reduce revolving debt balances.
The Lower the Score, the Higher the Increase
While you may know your FICO score or VantageScore ranges, this study categorized credit scores a little differently. Credit scores were defined as follows:
— Superprime: Above 760
— Prime: 680-760
— Near Prime: 620-680
— Subprime: Below 600
The study found that the average superprime credit card is granted a credit limit of more than $12,000 at origination, while the average subprime credit card limit is only $700.
By five years after origination, the average superprime credit card limit increased to $15,000 — a 25% increase. But the credit limit on the average subprime credit card increased to $2,700 — a 285% increase. Study authors say this tactic is consistent with “low-and-grow” strategies, which give higher-risk borrowers low initial credit limits and then increase them based on borrower behavior.
So, how exactly are banks deciding which consumers receive these credit limit increases? With an increasingly common technology: AI.
The Tech Behind the Rise
According to the study, lenders that mention “machine learning” or “artificial intelligence” in their official financial reports are more likely to use this data to determine which consumers receive credit limit increases. And lenders with “above median” mentions of AI have a higher share of revolving balances that were made possible by said credit limit increases.
“Banks are using increasingly sophisticated models to predict which customers will borrow more if their limit is raised. For many, that means an automatic increase they never asked for and may not fully understand,” says Agnes Kovacs, study author and senior lecturer in economics at King’s Business School. “Our findings show that when algorithms target borrowers already in debt, the result is often higher borrowing and greater financial vulnerability.”
[Read: Best Credit Cards.]
What to Do if You Don’t Want That Credit Limit Increase
If you’re worried about increasing your balances due to an unrequested credit limit increase, you can call your issuer and request that it revert your limit back to the previous amount. You can also get ahead of these automatic credit limit increases and request your issuer not do so without your consent first.
While it is true a higher credit limit usually means a lower credit utilization ratio — and therefore a higher credit score — that only works if you don’t increase your spending. Remember, that higher credit limit is there to tempt you into spending more. Only accept it if you know it will provide more benefits than drawbacks.
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Your Issuer Just Raised Your Credit Limit. Don’t Fall for It. originally appeared on usnews.com