Your credit history shows how your financial behavior when it comes to credit. Any credit activities on your credit accounts such as borrowing money, payment history, late payments, collections, etc., will all be part of your credit history. Your credit history also shows how long you have been using credit. The longer you have used credit and behaved, the better. Credit card issuers rely on this information and many more to determine your credit card limit.
Your current financial standing also helps lenders in determining your credit card limit. For example, a person who has bad credit or with no credit history will initially qualify for a lower credit card limit. This is because bad credits are associated with bad past financial decisions and lenders cannot trust you if you don’t have a solid credit history. There are other factors that affect how your credit limit is determined. This article will explain in detail what determines your credit limit and how to increase your limit.
What is the credit limit on credit cards?
Each credit card comes with a maximum credit extended for you by the lender which is referred to as the credit limit. In order words, your credit card limit is the amount of revolving credit the card issuer allows you to spend on your credit card. Once you have reached that limit, you will not be allowed to use your credit card until you have paid off some of your balances.
Each credit card comes with its own credit limit range. Your lenders determine your credit card limit based on your credit activities, current financial standing, other debts you have, and the credit limit range of that credit card.
Some credit cards come with higher credit limit ranges. Others are designed to have lower ranges due to intended users. For example, student credit card limits have lower ranges because intended users have no solid incomes or solid credit history. No matter how good your credit is, you cannot have a $30,000 credit limit on a student credit card. This is because student credit cards are designed for starters, and therefore, come with much fewer credit card limits compared to regular credit cards.
The following are factors that help credit card issuers to determine your credit card limit and how you can increase your credit card limit.
Related: Does your credit score go lower when you request Credit Limit Increase?
1. Your credit score
Your credit score is a major factor that helps lenders to determine your credit card limit. All information related to your credit accounts gets reported to major credit reporting agencies(Equifax, TransUnion, and Experian). After receiving your information, major credit bureaus make your credit reports and calculate your credit scores using credit scoring models. There are three common credit scoring models which are the FICO score model and the VantageScore model. If you have a good credit score, then you may qualify for a good credit card limit on your credit card. With a bad credit score, you might be denied credit or have a low credit limit especially if you are rebuilding your credit or don’t have a credit history.
People with no credit history usually qualify for low credit limits. You need to be a good credit user before lenders can trust you with a higher credit card limit. That is why if you are getting started with credit or rebuilding your credit, you will be approved for a low credit limit. As you use your starter credit card, your card issuer will increase your credit limit either automatically or by a request.
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2. Your income
One of the most important factors that credit card issuers use when determining your credit limit is your income. Credit cards are a form of debt and your ability to pay it off is very important. Having a stable income is very critical when applying for credit cards.
Your income comes in place when determining your creditworthiness and how much you will qualify for. You cannot borrow money without the financial means to pay it back. The higher your income, the more credit limit will qualify for.
3. Economic conditions
The lending industry performs well when economic conditions are favorable. During economic contractions, banks and other lending institutions issue fewer loans. This is because people are more likely to lose their jobs and default on their loans during economic downturns.
How does it work? Businesses don’t make enough sales which lower their profit margins. In order to balance the losses from sales they are not making, companies reduce their expenses by letting people go. A company cannot stay fully staffed after losing 50% or more of its customers. As a borrower, you cannot make your payments after losing your job. Credit card issuers and other lenders are aware of this economic cycle. Creditors only extend credit to the most qualified borrowers during economic hardships. In other words, lenders minimize risks by giving fewer credits.
4. The intention of the credit card
Each credit card has specific usage and what the company expects to receive in return. So, your approval rate and the credit limit you get will depend on the goals and policies of the company regarding credit cards.
5. Debt-to-income ratio(DTI ratio)
The debt-to-income ratio(DTI ratio) is the ratio of your monthly debt payment to your income. A higher ratio shows that you currently have a lot of debt compared to your income. This makes it difficult for you to take on more debt. That is why you might be denied more credit limits or get a much lower limit compared to the average person in a similar category when you have a high DTI ratio.
Lenders always use your DTI ratio to determine your credit card limit. It is always a good idea to lower your DTI ratio by paying off some of your debts before you apply for a credit card. The rule of thumb is to keep your DTI ratio under 28%. Some lenders, however, will approve you for credit for a DTI ratio of 36% or a little higher. Too much debt will affect your eligibility for more credit.
6. Your history with the credit card issuer
Loyalty is very important in this world no matter your business dealings. When you have a solid history with a credit card company, you get approved much faster than someone who does not. This is because they have known you for a while, they conducted business with you and had no problems with all business activities you had with them before.
For example, if you have a credit card from one company, it will be easier and faster to qualify for a second credit card due to the history you have with them. This principle applies to every part of life.
How long you have been with the company plays an impact on your approval rate and when determining your credit limit. If you have a good history with a credit card issuer, you will more likely qualify for a good credit limit compared to how much you could qualify if you were new.
How to increase your credit limit?
Even in you might have been qualified for a low credit limit, there are ways you can use to increase your credit limit. The following are some of the tips you can implement to boost your credit limit.
- Update your income information. If your credit card issuer approved you for a low credit limit due to a small income, make sure that you update your income as soon as you get a higher job or a raise. This will help your lender to adjust your credit limit in response to your new income.
- Let the lender update your credit limit automatically. Most lenders increase your credit limit as you build your credit history and prove yourself worthy of more credit.
- Request a credit limit increase. If you think you made some changes to your financial situation, you might not need to wait for your credit card issuer to increase your credit limit automatically. You can request a higher credit limit by either calling your card issuer or submitting a request from your online account. The card issuer will review your application and make decisions based on what you submitted. Keep in mind that requesting for higher credit card limit might result in a hard inquiry on your credit report. One hard inquiry will knock off about 6 points from your credit score. In addition, a hard inquiry will stay on your credit report for 2 years but it will not affect your score after 12 months.
The bottom line
The credit limit on your credit card is a form of revolving credit. Like any other debt, credit card issuers will rely on any of your financial information to determine your credit card limit.
In order to qualify for a higher credit card limit, you need to focus on building your credit history, increasing your credit score, lowering your credit utilization on existing credit cards, and lowering your DTI ratio. There are other factors that will impact the credit limit you get. Some of these factors will be out of your control such as economic conditions. For this reason, you need to focus on factors you are in control of if you need a higher credit limit on your credit card.
