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How Credit Card Companies Determine Credit Limit

Your credit limit is the maximum amount that a credit card company or bank allows you to charge on your card. Some issuers set this limit based on your likelihood to pay your credit card debts. With such issuers, a low credit limit indicates little trust in your ability to spend and pay, while a high limit means the issuer trusts your money handling and borrowing capabilities.

Other issuers, on the other hand, just follow preset credit limits that are not related to your likelihood to pay. If you have ever wondered how credit card issuers come about the credit limits set on their cards, this post is for you, as it explains in detail how credit card companies determine credit limits. There are three ways credit card issuers determine your credit limit.

How Credit Card Companies Determine Credit Limit

1. The preset limit system

Some credit card issuers prefer the simple method of offering credit cards with predetermined credit limits. As a consumer, you can apply for whichever card you would like. For example, a run-of-the-mill green card would come with a preset limit of $500, the gold card would come with $2,000, and the platinum card would get a limit of $5,000. The same limit applies to you and every other customer that applies for the same card.

Note, however, that not all cards are for everyone. Just because you applied for a gold or platinum card doesn’t mean you will be issued the card. For each card, there are certain credit score and income level requirements that you must meet. But it’s not a highly personalized arrangement. If the limit seems oddly huge or small, it’s not a reflection of your income level or credit score (though both factors are looked into). It’s probably because you applied for the wrong card.

2. The credit-based system

Other credit card issuers determine your credit card’s limit by looking into your credit history. This process is similar to how issuers use your credit history to figure out the interest rate on your credit card. For example, if a credit card offer comes with a credit limit ranging between $1,500 and $5,000, those with higher credit scores will get the $5,000 credit limit.

Those with around-average credit scores will get a credit limit somewhere in the middle of the range. And those with the lowest credit scores will get the minimum credit limit of $1,500. But issuers sometimes deviate from their fixed formulas for existing customers.

3. The fully customized system

Some credit card issuers will take pains to minimize risk by objectively evaluating a number of variables to determine the spending limit on your credit card. Here some of the variables they consider:

4 Factors that Determine the Credit Limit on your Credit Card

a. Your credit score

Some credit card issuers will want to know what your borrowing and payment history is like—because they believe your past is a reliable indicator of your future. Such issuers will base their judgment on your credit score as stated in your credit report. Your credit score is composed on six factors, in order of significance:

  • Credit utilization rate

This is the overall percentage of your credit limit you typically use. The lower this percentage, the higher your credit score.

  • Payment history

This shows how promptly you make your bill payments. This is scored on a scale of 1 to 100. The higher your on-time payment history score, the higher your credit score.

  • Age of credit history

This shows how many years you have spent building your credit, taking both open and closed accounts into account. The longer your credit history, the more easily the issuer can assess your creditworthiness.

  • Total number of accounts

This is the number of credit accounts you have on your credit report, including credit cards, auto loans, mortgages, personal loans, and student loans.

  • Number of hard credit inquiries

Hard enquiries are recorded on your credit report each time you apply for credit, but they will fall off your report after two years. If you have too many recent credit inquiries, this can send signals that you are desperate for credit, which may cause a reduction in your credit score.

  • Number of derogatory remarks

Derogatory remarks refer to accounts in collections, civil judgments, tax liens, and bankruptcies. Even a single derogatory remark can drastically reduce your credit score, so it’s best to avoid them. All these factors are used to calculate a three-digit number (your credit score) that represents the likelihood that you will pay back your debt. Your credit sore puts you into one of three credit rating categories: poor, fair, good, or excellent.

b. Your personal income

Credit issuers are usually interested in knowing how much income you earn. This explains why they request a bit of personal and financial information when you’re completing your application for a credit card. Having details of your income will help them figure out if you earn enough to the able to cover everything you charge.

For example, if you earn no more than $20,000 per annum and are trying to apply for a credit line of $25,000, your application will most likely be rejected because the risk to the issuer may be too great. However, if your salary is $100,000 and have few financial obligations eating into that income, then chances are greater than you can handle a $25,000 credit line.

c. Your debt-to-income ratio

This is another factor that credit card issuers consider before accepting or declining your credit card application. You may have a high income, but if you are also in a lot of debt, you may have difficulties paying off your credit card debt. As a result, the issuer may not want to risk giving you a credit card with high spending limit.

d. Repayment history

Because your credit score and income level don’t always tell the full story about your financial discipline, issuers look into your repayment history. This shows how often you have paid back your debts on time. Your issuer can only a set high limit on your credit card if you have been responsible and disciplined with your other lines of credit.

There are other factors credit card companies and banks consider when setting your credit card limit, such as their own policies as well as economic matters. But those are not as important as the ones discussed above.