Of course the bank isn't making money off of me. But by increasing my limit, they're hoping I'll say "oooh look at all the pretty things I can buy now!" and mess myself up. Nice try, banks. I'm onto you!
This is not completely true. I used to run a business and alot of the profits for credit card companies is the 3.5% to 7.5% charge, depending on the card, to the business, at the time of purchase. Credit card companies allways make sure they get their share, even in the odd case(like us) where the balance is paid off every month.
This is actually very accurate. I remember a news report where they interviewed some high level executive of one of the major credit card carriers, and the subject came to those people who pay off their balance in full every month. The news reporter had it in her mind that these must be the worst customers for the credit card companies since they don't pay any finance charges, and the exec dropped some knowledge on her. He gave her a look of WTF?!? and informed her that these were actually the BEST customers of credit card companies, and ones that they heavily targeted in marketing. The reason being, they were collecting the same merchant fees off of their usage (more so, since more of their disposable income could be used for new spending rather than paying interest), and they rarely if ever had to worry about default, which was a huge impairment to profitability.
He ran the math for her and proposed 2 people*:
'Pay in Full Guy' with a $5k credit limit spending $1k a month, paying it in full, paying no interest, but generating $360 a year in merchant fees ($12,000*3%) and a 1% chance of defaulting on $1k ($10 expected loss)
'Max My Balance Guy' with a $5k credit limit, a $4k balance, $1k spending a month, generating the same $360 a year in merchant fees but also paying $720 a year in interest ($4k*18%), but a 5% chance of defaulting on $5k ($250 expected loss).
'Pay in Full Guy' generates more income per $1 at risk than does 'Max My Balance Guy', which means for every $1,000 of capital a bank is willing to risk, they can have 100 'Pay in Full' Guys generating $36,000 a year, or 4 'Max My Balance' Guys generating $4,320. From there it was pretty obvious why 'Pay in Full' was awesome and you want the most of them you can get.
*I forget the actual numbers, but you get my point