Have you ever wondered how lenders establish your credit limit?
While in some cases this number may seem somewhat arbitrary and in others it feels highly personal, there are several methods creditors can use to evaluate just how much credit you can safely handle.
Product-Based Credit Limit
The most basic way is for the customer to choose a card based on a range of products the lender offers. The customer applies for the credit card they think will best meet their needs and the lender determines if the applicant meets the minimum qualifications necessary to be approved for the card.
For example, a lender may offer 6 credit cards, all with pre-determined credit limits, rewards, perks, and fees. Each product will have minimum approval requirements based on the income level and credit score of the applicant. You can quickly be turned down for a card if you don’t meet the basic requirements. This is not seen as a personal rejection, but rather an indication the card you’ve applied for just isn’t right for you.
Credit-Based Credit Limit
In this scenario, a credit limit is based solely on your credit history. The better your credit score, the higher your limit is likely to be.
For example, in the case of a credit card with a possible credit limit range of $500 -$10,000, the credit you are approved for will be closer to $500 if your score is low and closer to $10,000 if your credit history is excellent. If you already have a relationship with the lender, this amount can be slightly variable. In time, if your credit score improves, you could be re-evaluated and approved for a higher credit limit.
Customized Credit Limit
This is the most complicated way your bank determines credit limit. The creditor may consider different variables such as credit history, income, debt-to-income ratio, what other credit cards you have and/or use formulas to determine your risk of bankruptcy in determining your credit limit. Lenders take this route to minimize the risk of not only lending money to you but to keep their overall portfolios as healthy as possible.
Can My Credit Limit Change?
The short answer is yes, but how much it changes depends entirely on the lender and how you have chosen to use your card.
Lenders review accounts periodically and may adjust credit limits based on their findings. Negative usage patterns such as a late payment could flag your file and generate an automatic review of your account.
- If you have a balance on your card and are chronically late with payments or have a declining credit rating, the upper limit of your credit could be reduced in an effort to minimize the lender’s risk.
- If you are trying to consolidate multiple credit cards or simply want a higher limit, you can ask for an increase. Your lender may approve your request if you have a solid repayment history.
Lenders set credit limits based on what they feel is least risky for them. However, aiming for a specific credit limit should be an important goal for you too. Your credit limit should be high enough to meet your financial purpose of applying for the card in the first place, yet low enough to dissuade you from making purchases you can’t really afford. In the end, it’s important to think carefully about a what credit limit you are offered and whether it will help you meet your financial goals.
If you need expert advice on reaching your financial goals, call Great American Credit Repair Company today at 1-800-603-1943 for your FREE consultation.
About Great American Credit Repair Company
Great American Credit Repair Company…….because you deserve a fresh start! Call us today at 1-800-603-1943 for your FREE consultation. Our financial experts will work diligently on your behalf to raise your credit score and repair bad credit. We are attorney-approved and offer the industry’s only Money Back Triple Results Warranty to protect your investment.
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