How Credit Card Companies Determine Credit Limit
Underwriting is a complex procedure used by the credit card companies to determine the limit on your credit card. This process works as per the mathematical formulae, analysis, and considerable testing. Any details of this process are protected since this is the way to the company’s revenue stream. The primarily important detail of the matter is that this process of computation assists the company in deciding who to approve, at what limit, and the rate to be charged. The higher the credit limit, the more is the company’s trust towards the borrower in terms of repayment of his or her debt.
Below are some basic principles that the credit card companies take into consideration to support the amount of credit allowed to you.
Firstly, What Is a Credit Limit?
A credit card limit is the credit amount that the card issuer allows to its cardholders. The credit limit, often known as a credit line, is determined once the credit card application has been approved depending on the applicant’s credit quality. This limit can also increase with time considering that the card is used responsibly. Customers can also put in requests with their issuers to increase the credit card limit as time passes by in order to meet their changing needs and requirements.
Cards with Preset Limits
Most of the credit cards come with a preset credit limit. This means once your credit quality is assessed and determined by your issuer, they will assign a fixed amount of outstanding dues that you can be having on your credit card account in terms of any new expenditures or existing transferred balances. This preset credit limit can increase with time or upon any request made by the cardholder if the credit scores are healthy and the card issuer is willing to extend some additional credit.
Cards with No-Preset Limits
Some premium cards come with credit limits that are not preset and have a dynamic nature. This means they can contract or grow depending on your actual spending requirements and behavior. However, if there is any deep-pocket expenditure that is anticipated the dynamic line of credit can usually account for such spending, which is off-pattern because there is enough flexibility offered in such types of credit lines.
Most of the credit card companies go through your credit reports along with your gross yearly income level in order to determine the limit to the credit extended to you. Some of the factors that the card issuers like to take into consideration are the length of your credit history, repayment history, and your report’s credit accounts. These include student loans, mortgages, personal loans, auto loans, and so one. Additionally, the issuers also choose to see the number of inquiries that have been initiated on your credit report, along with the number of derogatory marks, such as collections, bankruptcy, or civil judgments. Accordingly, your credit limit is funded by the company.
The underwriting procedure is different for every credit card company. Some of the card issuers also check the credit reports of the applicants to discover the credit limits on their other existing cards. Whereas, other agencies compare different kinds of scores, for example, the credit score of the applicant, the bankruptcy score, in order to figure out how much funds should be issued to the borrower.
Some issuers might also take into consideration the work history of the credit card seeker or the debt to income ratio of the applicant. This helps in deciding how much risk is involved while extending credit to the applicant. The more credible the work history of the credit card seeker and the lower the debt he or she holds, the more are the chances of the seeker receiving high credit.
How Can Cardholders Apply for Increased Credit Limits?
Card applicants have higher chances of getting their credit limit increased if they have an established responsible record of credit card usage and have managed to make repayments of any outstanding dues in full on or before the due date. Credit card companies tend to re-evaluate on a periodic basis such as every 6 months and may increase the credit limit automatically for the applicant if the conditions allow.
Some of the card issuers inform their cardmembers that they qualify for a higher limit and whether or not they would like to apply for increased credit limits. Alternatively, members can also request for an increased limit by displaying responsible behavior.
On the contrary, card issuers tend to request a decrease in the credit limit if they see themselves falling behind in their timely payments, or if they see themselves exceeding their limits. You can check your limit for credit simply by calling your credit card issuer’s helpline number or by logging onto your bank’s online portal.
In a Nutshell
The credit card providers determine the limit for credit of an applicant through a procedure known as underwriting, which differs from one company to another. But generally, the process includes taking into consideration factors such as an applicant’s credit score, credit card performance history, and income level. Cardholders can increase their limit by keeping with their limit and paying their dues off on time.