General Loans

Understanding How Your Credit Limit Is Determined

Every credit card has a charge limit, which is known as the card’s credit limit. The lender sets the dollar amount once a person is approved for their new line of credit. Usually, each new line of credit has a different limit and can range from a small amount to an extremely high amount.

But, how do lenders determine these limits?

1. Credit Score

Credit scores and credit reports can be complicated to understand, especially if you have never looked at one before. To break it down to the basics, credit scores are composed of six factors:

-Credit card utilization rate: This number is the total percentage of credit limits you are currently using, which is calculated by dividing your total credit card balances by your total credit card limits. The lower the percentage, the higher your credit score.

-On-time payment history: Your credit score reflects how often you’ve made on-time payments.

-Age of credit history: In order to build good credit, lenders appreciate seeing a history of faithful transactions. This section of the report details how long you’ve been building credit in both open and closed accounts.

Understanding How Your Credit Limit Is Determined

-Accounts: This shows the number of credit accounts you have open, including credit cards, mortgages, car loans, student loans, and personal loans.

-Credit Inquiries: This details each time you have applied for credit. Lenders are interested in seeing how often you have applied, for too many applications in a recent period can make you seem financially unstable.

-Derogatory remarks: This section lists how many accounts in collections, bankruptcies, civil judgments, and tax liens you have. Any of these can significantly decrease your credit score.

Since credit card debt has a habit of snowballing, which can reflect negatively on your credit report, credit users should consider consolidating their debt into one account in order to start paying down their debt. Balance transfer credit cards offer cardholders the ability to get ahead of their debt by consolidating it into one payment on a low-interest card. Jeffrey Weber of SmartBalanceTransfers.com states, “With a balance transfer credit card, users can still build credit and receive credit card rewards while paying down their debt at a low interest rate.”

2. Personal Income

How much you make annually also impacts your credit limit. Lenders need to know how much income you make in order to know how much you can charge onto your card.

3. Repayment History

Since your credit score and income do not always give lenders the full story, lenders do consider other factors such as your repayment history. This shows how often and faithfully you have paid back your debts on time. It reveals you responsibility and financial awareness.

4. Debt-to-Income Ratio

Lenders take the debt-to-income ratio seriously. Regardless of income, if lenders see a significant amount of debt in your account, they will be less likely to risk giving a credit card with a high limit. The best way to raise a limit is to start paying down debt as soon as possible.