Several banks in the UAE increase their customers’ credit card limits without them ever having requested this. It may be tempting to spend more money in these situations especially since so many people interpret the increase as a “reward” for paying card bills on time or for being loyal to the bank. But have you thought about the implications of using that additional line of credit? To make sure you use your credit card wisely, it’s worth understanding why a bank will suddenly extend more credit to you and why customers often hastily take up these offers.
Why has my bank increased my credit card limit all of a sudden?
When a bank increases your credit card limit without you applying for it, they have employed an up-selling marketing technique called an “Unsolicited Credit Card Limit-Increase Offer” or UCCLIO.
Banks could provide you with this offer if you are a long time customer and have been regularly paying off all or most of your outstanding balance before the due date. Interestingly enough, sometimes even if you hardly use your credit card, you may be offered a limit increase. In both cases, there is greater room for banks to encourage you to spend more and increase your outstanding balance.
Before accepting a credit card limit increase, you need to know:
1) It affects how much debt you can take on
When your credit card limit is raised, it eats into your debt-to-burden ratio (DBR). This is the maximum amount of debt you are allowed to take on as a percentage of your monthly salary. In the UAE, the DBR is capped at 50% of salary. Dubai resident Tom explains how he was only eligible for a lower mortgage amount due to his credit limit on his credit card which he never applied for.
“I got an email congratulating me on my credit card limit increase which I took for granted. A month later, when I applied for a mortgage with the same bank, they would not give me the amount I wanted because they said my new credit card limit had pushed my debt to burden ratio to 50%. I had to have them reverse the credit limit increase and only then was I able to obtain a mortgage”
2) Your spending could quickly spiral out of control
When presented with a UCCLIO, take a step back and think carefully because you could end up biting off more than you can chew. Ask yourself if you would be able to keep up with your payments before interest charges pile up. It is so easy to get tempted to spend more just by the fact that the limit is higher.
Suddenly, spending AED 10,000 on a AED 20,000 limit card only accounts for 50% and in our mind, may be seen as doable. But this is still credit and not cash that we own.
Why are so many customers quick to accept UCCLIOs?
There is evidence to suggest that psychology and human behavior play important roles in how UCCLIOs are received by customers. A research report published by the Consumer Affairs Department in Victoria, Australia revealed that some of the reasons why customers are likely to accept UCCLIOs include:
1) Easier access to additional funds without needing to go through a bank’s approval process. This is especially true since the credit limit increase is usually “pre-approved” by the bank
2) A perceived trust in the bank’s judgement when extending extra credit. Several customers believe that they receive UCCLIOs because they are truly eligible for it and that banks conduct thorough analysis before offering additional credit
3) The “just-in-case” approach to additional credit: customers have said they took up UCCLIOs with the intention of keeping the extra money handy in case of emergencies
4) Many customers perceive UCCLIOs as being limited time offers that they prefer to avail rather than rejecting them and having to go through application procedures later when they do need the money
According to the report, the reality is that most customers who accept credit limit increase offers eventually spend large portions of the money on non-emergency items. This only leads to these individuals raking up more debt that they are unable to pay off.
What if I don’t want my credit card limit increased?
Some banks will first call their customers, email them or send them an SMS offering a UCCLIO and they typically increase your limit after receiving your approval. But if you find out that your limit has increased without your knowledge, you can ask for it to be reversed.