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May

how credit limit is determined

To determine your maximum spending amount, or what is known as your credit limit, credit card companies look at a variety of factors. These are analyzed by underwriters who assess the risks of lending you money and define your limit.

Below you’ll find the common four factors credit card companies consider when deciding credit limits, how to request a higher limit and the benefits and disadvantages of a spending increase. This information can help increase your financial literacy and understanding of credit.

Factor #1: Company Guidelines

Some credit card companies have preset guidelines that determine your limit. For example, in the case of a secured credit card, your limit is already set. If this limit is $500, you cannot exceed that limit.

On the other hand, some cards have what are called floating limits. These are determined by your income, spending habits and any other factors that may fluctuate and provide the issuer with a reason to change your limit. In this sense, you are provided with a flexible limit but not an indefinite one.

The last type of limit you may be given based on company guidelines is a minimum rather than a maximum limit. This happens when the issuer states you have a minimum limit of $2,000. Keep in mind that these limits can change according to other factors, so it is best to contact your credit card issuer if you have any questions.

Factor #2: Your Credit Score

credit score and credit limits

Your credit score may also affect the credit limit a company offers you. Most of the time, credit card issuers have a cutoff point for the credit score they accept. Having good credit does provide you with the possibility of a higher limit, but that doesn’t mean you will automatically be refused a credit card if you have bad credit.

In fact, some companies may accept your application even if you have poor credit, but they may give you a lower credit limit to mitigate the risk. This allows you to build or begin to rebuild your credit with a smaller spending limit that is safer for the issuer.

Factor #3: Your Credit Report

The next factor that determines your credit limit is your credit report. This is a thorough document that informs the issuer about all details pertaining to your credit. The following is a list of some particulars that may be included in this account:

All of this information can help credit card issuers determine if you are a low credit risk. Things like applying for multiple accounts in the recent past and late payments make you a higher credit risk. Your credit report provides more details than the credit score, which allows the credit issuer to make a more informed decision about your application and what your credit limit should be.

Factor #4: Debt-to-Income Ratio

When calculating your credit score, your income isn’t taken into consideration. However, it is a large factor for determining your candidacy for credit cards and setting a credit limit. This is because credit card companies look at your debt-to-income, or DTI, ratio. This is your monthly expenses, such as car payment, rent, student loans and credit card payments, divided by your monthly income.

Credit issuers look at your DTI to decide if you can handle another monthly expense on top of what you already have. This doesn’t mean they will not approve your application, but it does factor into the credit limit they give you.

Getting a Higher Credit Limit

Sometimes, you need a higher limit on your credit cards. Whether that’s for an emergency, balance transfer or even just a boost for your credit, there are two ways to receive an increase. The first is an automatic increase issued by your credit card company.

Requesting an increase is the other way you can receive a higher credit limit. Some issuers offer the option of doing this online through your account, but most have you call the number on the back of your card. The representative you speak with may ask you for additional information such as your income, how much you want to increase your limit and why you are asking for an increase. After taking these factors into consideration, you’re told if you qualify for an increase.

Being financially responsible with your credit cards can result in you being eligible for a higher credit limit. Paying your bills consistently and on time can also help prove to credit issuers that you are responsible with your finances.

Pros of a High Credit Limit

Receiving an increase on your credit limit has many benefits. The biggest one may be the personal pride you feel knowing that you are financially responsible and have proven that to credit card issuers. Other, more tangible benefits of a limit increase are listed here:

Cons of a High Credit Limit

While having a higher credit limit may be a good thing, there are a few disadvantages that come along with it. For example, when you request a limit increase, the issuer looks at your credit report. A soft inquiry doesn’t affect this, but a hard inquiry does and can make applying for other increases difficult.

Another con of a higher limit is that there is greater spending power. That means you have the ability to buy more things than you have in the past, which can lead to more debt if you aren’t careful.

Understanding Your Credit Limit

how to understand credit limits

Once you understand what factors determine your credit card limit, you can better understand how credit works. From there, you can work to improve your credit and make sure you stay on top of your credit score. If you’re having trouble qualifying for a credit card, sign up for credit repair today to take control of your credit and improve your finances. Your credit is in your hands.

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Posted in Credit 101