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How credit card companies determine credit limits

by SuperiorInvest

Credit card companies determine your credit limit through a process called subscription, which uses mathematical formulas to assess your credit quality. Each company has its own underwriting process that decides who it approves, at what rate, and at what line of credit limit.

The higher the credit limit, the more risk the company takes. So card issuers provide higher lines of credit to more trustworthy borrowers or those with higher credit scores, higher incomes and other signs of financial soundness.

Here are the basic factors that credit card issuers consider when determining your credit limit, as well as some strategies for increasing your credit limit.

What is a credit limit?

Credit card credit limit is the amount of credit that the card issuer will provide to the cardholder. This credit limit, also called the credit line, is set after the application is approved based on the customer’s requirements credit quality. The credit card company will consider factors such as your current debt obligations, your repayment history, your credit score and your income.

The credit limit can automatically increase over time if you demonstrate that you are a responsible cardholder, for example by making your payments on time. Customers can also request a credit limit increase.

Most credit cards have a pre-set credit limit. This means that once the issuer determines your credit quality, they will assign you a set dollar amount of outstanding balances that you can have on your account for new purchases and/or transferred balances.

Typically, if you make a purchase when your card is over the limit, your purchase may be declined or your credit card company may charge you a fee. Going over your credit limit can also affect your credit score, potentially lowering your credit limit or increasing your interest rate.

Some premium credit cards and charge cards, while not as common, have credit limits that are dynamic, meaning they can increase or decrease based on your spending needs and credit card management. However, if you expect to make a large purchase, a dynamic credit line can usually cover expenses that break the pattern because they have more flexibility.

What affects your credit limit?

Most companies check your credit report and gross annual income level to determine your credit limit. Factors issuers are likely to consider include your repayment history, the length of your credit history and the number of credit accounts on your report.

These include mortgages, student loans, car loans, personal loans and other credit cards. Issuers also check the number of new loan inquiries on your credit report as well as negative factors such as bankruptcies, collections, civil judgments or tax liens.

The underwriting process varies from company to company. Some issuers also check applicants’ credit reports to determine limits on their other credit cards.

Other agencies compare different types of scores, such as an applicant’s credit score and bankruptcy score, to determine how much to finance a borrower. Issuers may also consider your work history or debt to income (DTI) ratio to decide how much of a risk you are. The more credible your work history and the lower your debt, the more likely you are to get higher financing.

How to increase your credit limit

Your credit limit is more likely to increase if you’ve established a record of responsible usage and repayment, such as paying all balances in full and on or before your bill’s due date.

Companies tend to re-evaluate every six months and may automatically increase loan amounts to applicants. Some issuers will notify cardholders that they are eligible for a limit and ask if they want to apply for it. Cardholders can also apply for an increase.

On the other hand, issuers can lower your credit limit if you fall behind on their payments or exceed them credit card limits. You can check your credit limit by calling your card issuer’s number, which is usually found on the back of your card, or by logging into your account online.

How can I increase my credit limit?

Over time, you can increase your credit limit by paying your bills on time and not spending more than your limit to improve your credit score. You can increase your limit faster if you pay your balance in full each month or more than the minimum payment. If you increase your income or reduce your monthly debt obligations, you can also potentially increase your credit limit.

How do credit card companies determine my credit limit?

Credit limits are set through subscription. This process uses mathematical formulas, extensive testing and analysis to determine how much debt you are likely to pay off. Credit card companies consider your credit history, your income, your other debt and other financial factors when determining your credit limit.

Is a high credit limit good?

The main advantage of a high credit limit is that you have more money to spend. But with a higher credit limit, you may be more tempted to overspend. If you spend more than you can afford to pay back, you can get into a debt cycle and pay significant interest.

Bottom Line

Credit card companies determine an applicant’s credit limit through a process called underwriting, which varies from company to company but generally involves taking into account your financial factors, such as your credit score, credit card payment history and income level. Cardholders can increase their credit limit by making on-time payments, making more than minimum payments and staying within their credit limit.

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