How Banks Decide Your Credit Card Limit

by Venus Zoleta, on category "Credit Card,Personal Finance"

June 26, 2018


Credit Card Limit | MoneyMax.ph

The credit card limit is one of the most important things to understand when you’re applying for a card. Your credit limit affects how much you can spend with your plastic card. Of course, you want to have the highest possible credit card limit because that means increased purchasing power.
But unfortunately, you’ll never know how much your credit limit will be until you’re approved for a credit card. The closest you can get to predicting your credit card limit is finding out how banks arrive at this figure. This will give you an idea of whether you’ll get a high or low credit limit.
While you’re shopping around for a credit card, get to know what a credit card limit is and how it’s calculated.

What is a Credit Card Limit?

Credit Card Limit | MoneyMax.ph

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A credit card limit is the maximum balance you can have on your card at any given time. It includes your purchases, finance charges, service and penalty fees, balance transfers, and cash advances. Put simply, it’s the total amount you can spend using your card. The higher it is, the more you can charge to your credit card.
If you own multiple credit cards, the bank may either set a credit limit for each card or a single limit across all your cards.
Unlike loans with fixed amounts and terms, the credit limit on a card isn’t set over a span of time. This means you can keep on using your card as long as you pay your credit card bills regularly and stay within your credit limit.
When you reach your credit card limit, the issuing bank may either decline your succeeding purchases with your card or charge you an overlimit fee until you’ve paid off at least a portion of your balance.

How do Banks Set Your Credit Limit?

How Banks Determine Credit Card Limit | MoneyMax.ph

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On a secured credit card, you can control your credit limit because it’s equal to 80% to 100% of your security deposit (which serves as your collateral) to the issuing bank.
As for unsecured or traditional credit cards, it’s a lot more complicated. Credit card providers decide how much credit limit customers can have on their credit cards. But banks don’t do it randomly.
Banks conduct credit evaluations to decide how much credit to give to each applicant. They consider a variety of factors to get a full picture of your financial status, accurately determine your creditworthiness, and come up with a reasonable credit limit.

Credit History

Your credit history shows how disciplined you’ve been in managing your debts and maintaining a good credit score.
If you’ve been a good borrower, you’re likely to get a higher credit card limit. But if your credit history is poor (e.g., late and missed payments, exceeding the credit limit on other cards, etc.), banks will give you a lower credit limit.
Having no credit history will also lead to a low credit card limit because banks have no credit data to use as a basis for calculating the credit limit.

Income

Your salary, benefits, and other income sources, as indicated in the income documents (payslips, income tax returns, certificate of employment, etc.) you’ve submitted to the bank, are also used to determine your credit card limit.
Having a high income raises your chance of getting a high credit card limit. But your income alone doesn’t guarantee that the bank will approve a high credit limit for you. Your level of debt and of course, your credit history, come into play as well.

Debt-to-Income Ratio

Banks check your debt-to-income ratio to help them decide the credit card limit they’ll give to you. They look at your loans, mortgage, and other credit cards to know how much of your income is needed to pay for your debts.
To compute your debt-to-income ratio, get your total monthly debt payments and divide them by your gross monthly income.
You’d want your debt-to-income ratio to be low (ideally 12% of your income or lower) because this results in a high credit card limit. If yours is high, you’re likely to get a low credit limit even if your income is high.

Can You Get a Higher Credit Card Limit?

How Banks Determine Credit Card Limit | MoneyMax.ph

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Unhappy with your current credit limit? The good news is that you aren’t stuck with it forever.
Banks review their clients’ credit and adjust credit card limits accordingly. If you’ve been a responsible borrower for several months (like if you pay off your monthly balance and avoid maxing out your card), your credit card provider might increase your credit limit, which will show on your statement of account.
However, not all banks automatically raise credit card limits. If that’s the case with your credit card provider, you’ll have to apply for a higher credit limit by calling the bank or sending your application through your online banking account. The bank will ask you to update your income and provide necessary supporting documents so that it can properly assess your current credit limit.

Final Thoughts

While your actual credit card limit is unpredictable when you’re applying for a card, you can raise your chance of getting approved for a higher credit card limit. Improve your credit score, increase your income, and manage your credit cards responsibly.
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