How A Credit Card Company Determines Your Credit Limit

Most people probably have no idea how their credit card limit was set. It is a bit of a well-kept secret, but there are a few factors that are generally considered when determining a credit card limit. Let’s explore a few of those.

Income

Obviously, a credit card company is going to want to know how much money you make. Doing so helps them mitigate their risk in letting you spend their money (and hoping you pay it back). For example, let’s say you make $40,000 per year. That comes out to $3,333.33 per month in gross pay. After taxes, rent (or mortgage) and all of your other expenses, you’ll probably only have a few hundred left over to pay off items such as credit card bills. Thus, you’ll probably have a modest credit limit. After all, would you extend a $100,000 line of credit to someone who made $40,000 per year? Of course not. If that person went on a worldwide travel binge and disappeared after maxing out the card, you’d stand to have a major loss on your hands. That’s not the best way to stay in business!

Length of Residency

This may not seem all that relevant, but people with a financial stake in your life tend to get jittery when you move around frequently. They may begin to think that you are unable to pay your rent, are being evicted or have some other serious issues going on. Thus, they usually like people to stay at a residence for a least one year. I don’t recommend staying in your apartment for another six months if your neighborhood is going down the tubes, but it would help you get a higher credit limit if you did so!

Debt

Let’s throw your credit score into the debt category (although it comprises many factors of your financial life). Obviously,

a low credit score is going to hurt your chances of getting a favorable credit limit, just as it would in any other situation in which you want to use someone else’s money. Now, the determination of your credit score, the factors that go into it and how it is used it are debatable, as actions that seem contradictory to remaining in good financial standing (opening an additional credit card, etc.) often raise a credit score. As financial guru Dave Ramsey has been known to say, he would be rejected for an apartment lease based on his credit score, but he could buy the whole complex with a check! However, it is a reality in the modern financial world, so it’ll still be taken into consideration when determining your credit limit.

Your personal debts, in general, are going to be considered when determining your credit score. The more debt you have, the more reluctant a credit card company will be to give you a favorable limit. Think about it this way – if your friend was knee-deep in debt from car loans, student loans and other forms of debt, would you feel comfortable that he’d pay you $10,000 back on time? Probably not.

Other Credit Cards

If you own a bunch of other credit cards, this will likely hurt your chances of getting a high credit limit. This is because of the other potential debt that you may incur. Imagine if you had eight credit cards – each with a $10,000 limit – and your income dropped to $25,000 per year. Company nine is probably going to give you a very low limit – if any – because you could max out all of your cards and have an extremely difficult time paying them off. You’ll then be subject to declaring bankruptcy and the company would probably rather avoid going through that mess.

Source: creditshout.com

Category: Credit

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