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How Is My Credit Card Limit Determined?

Written by Equifax Experts on March 17, 2014 in Credit  |   No comments

Credit cards can be a great way build credit, but it’s important to use them responsibly. Understand how your credit limit is determined and how that limit can impact your credit utilization—a key factor in calculating your credit score.

credit scoreOnce you are approved for a new credit card, the first thing you may do is scan the enrollment information for your credit limit—how much you can charge on your new piece of plastic.

Even though it can be hard to predict exactly what your credit limit will be, there are common factors credit card issuers consider when calculating your credit limit, such as your credit history and income.

Credit history

Card issuers typically establish your credit limit after you’ve submitted your credit card application and they’ve reviewed your credit report to gauge your borrowing and repayment history.

Your credit score—a three-digit number used to assess your risk as a borrower that is calculated based on the information in your credit report—is used by card issuers to help them determine your credit limit, similar to the way your credit score is used to help calculate your card’s interest rate.

In general, a higher credit score could help you secure a higher credit limit. This is because consumers with higher credit scores usually have a history of positive credit behavior, such as paying bills on time and keeping their debt-to-credit ratio (how much available credit the consumer is using) low.

You may need to meet a minimum credit score requirement, depending on the credit card you’re considering, but the card issuer doesn’t always advertise this requirement.

Be aware that if you pull a copy of your credit report, you may see different credit scores. That’s because your credit score can vary between the credit reporting agencies. In addition, your credit scores are updated with each change in your credit file, and new information received can impact the model.

(Read: Can I Get a Credit Card with a Low Credit Score?)

Income

When you fill out a credit card application, you’ll likely be asked to disclose your personal income. Credit card lenders use your income information to set your credit limit because they want to know that you have the means to pay back the money you borrowed.

In addition to your income, card lenders also evaluate your debt-to-income ratio, which is the percentage of your gross monthly income that goes towards debt payments.

If you have a high income but are buried under a mountain of debt, for example, a credit card lender may not offer you a high credit limit because you could have issues paying off a maxed-out card.

It’s important to note that when the Credit Card Accountability Responsibility and Disclosure Act —also known as the CARD Act—was passed into law in 2009, card issuers could only consider a credit card applicant’s independent income or assets. But in 2013, the Consumer Financial Protection Bureau amended the legislation so that card lenders could also consider household income that may be available to repay debt.

While both your credit history and income will likely influence your card’s limit, card issuers may also consider other factors, such as the limit on your other credit cards, internal company matters, the state of the economy, and whether or not you are an existing customer.

Practice positive credit behavior

Once you start using your new credit card, be mindful of your charging habits, regardless of whether you are offered a lower-than-expected credit line or a sky-high limit.

If you are extended a low credit limit, for example, and you then rack up a high balance, you could harm your debt-to-credit ratio. In general, a lower debt-to-credit ratio can reflect positively on your credit score.

If your new credit card comes with a high limit, be careful not to charge beyond your means. If you regularly carry a high balance, the amount of money you dish out in interest could add up. If you start to miss payments, your credit score could suffer.

And remember, your credit card may not have the same credit limit forever. Credit card issuers regularly review accounts and pull consumers’ credit reports. If you have a history of making on-time payments, your credit limit may be raised, and you can also contact your card issuer directly to request a higher limit. However, if you make late payments—or don’t pay at all—your credit limit could be lowered.

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