How Do Credit Card Issuers Set Your Credit Limit?
Credit limits are the maximum amount you can borrow from your credit card issuer at any given time. Experian reported that the average credit card limit for all accounts was $30,365 in 2020. It can help to know where your credit limits are relative to the national average.
Credit card companies require a lot of information to manage risk. These details, such as your credit history, credit score, and income, will determine whether or not you are eligible to open a new account. These same factors are important when the card issuer decides the terms of your account. This includes your credit limit and interest rate.
You will be able to gain an edge by knowing the details that credit card companies care about. Credit card lenders and credit card issuers will consider you a low-risk borrower. This allows you to get better terms, such as lower interest rates or higher credit limits.
Factor #1: Credit Information
When setting your credit limit, credit card issuers will consider your credit information. This is probably not surprising. A company can learn a lot from your credit history and score about how you manage debt. If you will stand on their criteria, they can guaranteed approval credit cards with $1000 limits for bad credit.
Credit history gives you a snapshot of how you have managed credit in the past with credit card accounts, and other financial instruments. However, a credit score is a tool lenders can use for assessing risk. A FICO(r), Score, and a Credit Score will tell a lender your likelihood of being late or worse than 90 days on any credit obligations in the next 24 months.
You may be eligible for a higher credit limit if you have a high credit score. This could indicate that your risk level is lower. However, a poor credit score can reduce your credit card options and you will likely receive lower credit limits when you qualify.
Factor 2: The Debt-to Income (DTI) Ratio
Another detail that can help you determine your credit limit is the relationship between your income and the amount of debt you owe. DTI stands for debt-to-income ratio. It is calculated by multiplying your monthly debt payments and your gross monthly income.
A credit card company can use your DTI ratio to determine your ability to take on more debt. A high-interest credit card might be too expensive if you have a lot of debt relative to your income. A low DTI ratio will make it less likely that you will have problems in this area.
Factor 3: Credit Utilization Ratio
Creditors will not only look at your DTI ratio but they may also be interested in how you manage credit card accounts that you have. Your credit utilization rate could be high if you have high outstanding debts relative to your credit card limit.
Credit utilization that is high doesn’t look great on credit card applications. It can also damage your credit score, even if you pay on time every month.
High credit utilization can also lead to high costs. According to the Federal Reserve, the average interest rate for a credit card (among those with assessed interest) was 16.17% as of February 2022. If you pay your credit card bills each month, ideally before the statement close date, you might be able to keep your credit utilization low while also avoiding high-cost interest charges.
Factor 4: Relationship with the Creditor
When deciding whether to approve you for a new credit card account, the company will most likely look at any previous business relationships. If a card issuer approves you, it might also consider past or current transactions when setting your credit limit for your new account. And most of the time they guaranteed credit card approval no deposit.
Credit card approval could be affected by previous defaults or debts that were discharged in bankruptcy. However, this doesn’t mean that you can’t open another credit card , even after bankruptcy .
If you have credit cards that you already have with a credit card company you might be affected by your credit limit. If you have credit limits that are too high on other accounts, a card issuer may prefer to limit your credit limit. You can ask the card issuer to “move” a portion of the credit limit from an older account to the current one if this happens.
Factor #5 – Details You Cannot Control
You might not be aware of certain factors that can affect your credit limit. A credit card company might feel more comfortable or less comfortable lending credit depending on the economy and future economic forecasts. Credit card companies reduced credit limits for many customers during the initial phase of the pandemic. These moves were made in an effort to decrease their exposure to customers who couldn’t afford to pay their bills.
Credit limits could be affected by any new or pending credit card legislation. Some card issuers tried to reduce their risk exposure when the CARD Act of 2009 was passed.
How does your credit limit affect your credit score?
Your credit utilization rate is the relationship between your credit limit (or credit limit) and your credit card balance. Credit scores are influenced by credit utilization. Lower credit utilization levels are better for you. Higher credit limits could help you keep your credit utilization low.
A credit scoring model uses two details from your credit reports to calculate credit utilization for an individual account. These are your credit card limit, and the balance. The real-time balance of your account is irrelevant here. This is an important point to remember since credit card companies typically only update your account information once per month with the credit report agencies (Equifax TransUnion and Experian).
The greater the distance between your credit card limit and credit card balance, the better. This is where you can reap the benefits of having a higher credit limit. A lower credit utilization rate should be achieved if there is more distance between these two numbers.
Bottom line
Credit card issuers base their credit limit on a variety of factors, but the most important factor is how well you have managed your credit history up to that point. A high credit limit can help your credit score. However, it should be used with care. Be aware that you will not be notified in advance of the credit limit for your new card. Instead, choose a card that suits your spending habits and your needs, and not based on the credit limit you are hoping to receive.
