Bank Algorithms Raise Card Limits, Often for Borrowers in Debt

Americans are expanding credit limits on their credit cards with an assist from bank algorithms. These automated credit limit increases are focused on credit card customers who are already carrying debt and lead to more charges for issuers, according to a study from King’s Business School and the Federal Reserve Board.

Automated credit increases from issuers add up to $40 billion in additional credit for consumers  each quarter, according to the study Automated Credit Limit Increases and Consumer Welfare. 

Access to larger credit limits has increased consumer spending by about 30%, adding profits for banks with each charge. The profits for banks are even higher when a credit card customer carrying a balance decides to charge even more thanks to a new automated credit line increase. 

Unlike the process to determine the card’s initial credit line, which is based on information the borrower provides on income, employment and other data, the bank now has real-time user information on a borrower’s spending and payment patterns. This information is used when offering bank-initiated credit line increases. 

Consumer spending increases about 30% with access to larger credit lines.

“Indeed, while many aspects of credit card markets are regulated, there is little oversight of the factors lenders can use to proactively raise credit limits,” the study states. 

The reason for the study was to compare credit line increase policies in the U.S. with policies in place in Canada and the United Kingdom where banks are required to obtain consumer consent for credit limit increases.

In the U.S., one-third of unpaid credit card balances are due to credit line increases made after a card account was opened, the study reveals. This number rises to 60% for card customers with lower credit scores. 

Potential Impacts of Credit Line Hikes

The study points out that credit line increases are a means of loosening credit availability for consumers, and these increases also offer greater financial flexibility. 

Which consumers are receiving automated credit line increases from their card issuers? According to the study, credit card line increases are an important source of credit especially for higher credit risk and subprime and near prime borrowers.

But, of course, there is a downside of taking on a bigger credit line especially if you already are carrying debt and are unable to pay off credit card balances. And for some credit card customers this could lead to financial tough times and even bankruptcy if their debt should snowball beyond their means. 

Issuers would be faced with credit card delinquencies and chargeoffs if a credit card customer falls deeply behind credit card payments. Is this potential risk worth the profits involved in reaching the subprime and near prime market with credit line increases? Card issuers will need to weigh their options carefully. 

Positive Uses of Credit Line Increases

Overextending credit to the wrong subprime customer could be costly, but to many others a credit line increase may be a welcome influx of credit. 

According to a PYMNTS study, consumers see credit line increases as an important part of their financial planning with 71% using them for budgeting decisions.

Four in 10 surveyed card customers said they wanted to increase a credit line to improve their credit score, and 29% wanted to use the credit line increase to prepare for a big purchase such as travel or home repairs.

The Bottom Line

Banks are extending automated credit line increases based on bank algorithms to credit card customers, often to those who carry a balance on their cards. Banks make a profit with this practice but face the risk of extending too much credit to customers who aren’t able to handle it, including subprime and near prime customers.