All credit cards come with a credit card limit, which varies for the same card by the cardholder. In this article, we take a look at how credit card limits are determine.
Credit card companies use a complex process known as underwriting to determine your credit limit. You can associate underwriting with mathematical formulae and a fair bit of testing and analysis.
Banks and credit card issuers are reluctant to make their underwriting process public as it is an internal matter. But, the underwriting process helps a bank decide who they should approve. And what the rates and limits will be for each use case.
If the credit limit is more on the higher side. Then it shows that the borrower enjoys a reasonable bit of the bank’s trust. And they expect the cardholder to pay his debts in time.
What Is A Credit Limit?
A credit limit is best define as the credit the bank provides to the cardholders. Sometimes, the credit limit is also known as the credit line and is approve after a customer’s credit card application is approve.
Initially, the customer’s credit quality plays an important role in determining his credit limit. But, over time, as the cardholder uses his card responsibly, the bank will likely increase his credit limit. Similarly, the cardholder can request the bank to increase their credit limit based on their requirements.
Cards With Pre-Set Credit Limits
In most cases, credit cards issued feature a pre-set credit limit. So, the credit card issuer will first determine your credit quality. Then, they will come up with a specific figure representing the outstanding balances permitted over your credit card. This is going to be your pre-set limit.
Upon the cardholder’s request, the pre-set limit can also increase based on the card issuer’s discretion. It is, hence, recommendable to maintain healthy spending habits and keep an eye on one’s credit score.
Cards That Have No Pre-Set Credit Limits
Credit limits are dynamic and not pre-set in the case of a few of the premium charge cards and credit cards. This implies that the credit limits can grow or contract based on the cardholders’ spending behaviour or requirements.
Nevertheless, in case it is a large purchase that is under anticipation, then the spending is likely to be accommodate by the dynamic credit line. This is even while the spending does not follow a pattern because active credit lines are characterise by flexibility.
In most cases, credit card issuers are likely to check your gross annual income level and credit reports, which help determine your credit card limit. Herein, the most important factors to be consider include the number of credit accounts on your report, the size of your credit history, and your repayment history.
So, factors such as mortgages, auto loans, student loans, and personal loans affect one’s credit limit.
Another matter that the issuers keep an eye on is the number of inquiries that are initiate on one’s credit report. Derogatory remarks, if any, are also look into. They include tax liens, civil judgments, collections, and bankruptcies. The credit limit is accordingly decide upon.
Other Important Variables
From one organisation to the other, the underwriting process will vary. There may be cases wherein issuers go through applicants’ credit reports, which give them an idea about the limits on their other cards.
But, in several cases, agencies lay their focus on an entirely different set of scores, such as bankruptcy scores and credit scores. This lets them determine how much a borrower should be funde.
It may be possible that issuers choose to consider the borrower’s debt-to-income (DTI) ratio. This helps them determine the degree of risk an applicant poses.
But, overall, while an individual’s work history is credible and his debt is low, the more likely the individual is to receive increased funds.
The Procedure For Cardholders To Apply For A Credit Limit Increase
When a cardholder intends to increase his credit limit, he is likely to be grant the same if he has a well-define record of usage and repayment. They should be repaying their balance fully on or before the repayment date.
In general, one expects a company to re-evaluate after every six months. So, if the conditions define so, they may increase a borrower’s credit limit by themselves. Similarly, there are cases wherein issuers tell cardholders that they qualify for an increase in the credit limit, and then they ask the cardholders if they would like to go ahead with the same.
Now, cardholders can request the issuers to increase their credit limit if such be the requirement. But one also must remember that if one falls back on the payments, the issuers might choose to reduce a borrower’s credit limit.
If a cardholder is unsure about his credit limit, he can find out more about the same by logging on to his account online or calling the toll-free numbers behind his card.