How Credit Card Companies Determine Credit Limit

Credit card companies determine your credit limit through a complex process called underwriting, which works according to mathematical formulas, considerable testing, and analysis. Details of the procedure are protected since it's the way that the company makes its money. The heart of the matter is that this system of computation helps the company decide who to approve, at what rate and which limit. The higher the credit limit, the more that the company indicates that it trusts a borrower to repay their debt. Here are the basic principles that issuers use to determine your credit amount.

What is a Credit Limit?

A credit card credit limit is the amount of credit that a card issuer extends to its cardmembers. This credit limit, also called a credit line, is established once an application is approved based on the customer's credit quality and can increase over time with responsible card use. Customers can also request credit line increases over time to better meet their needs.

Cards With Preset Credit Limits

Most credit cards are issued with a preset credit limit. This means that once the issuer determines your credit quality they will assign a set dollar amount of outstanding balances you can have on your account in terms of new purchases and/or transferred balances. This preset limit. can increase over time or upon customer request if your credit scores warrant and the credit card issuer is willing to extend additional credit.

Cards with No-Preset Credit Limits

Some premium credit cards and charge cards come with credit limits that are not preset and are dynamic, meaning they can grow or contract based on your actual spending needs and behavior. However, if a large purchase is anticipated the dynamic credit line can usually accommodate spending that is out of pattern since there is flexibility is built in to these types of credit limits.

Credit History

Most companies check your credit reports and gross annual income level to determine your credit limit. Factors that issuers like to consider include your repayment history, the length of your credit history and the number of credit accounts on your report. These include mortgages, student loans, auto loans, personal loans and the like. Issuers also check the number of inquiries initiated on your credit report, as well as the number of derogatory marks, such as bankruptcies, collections, civil judgments or tax liens. The company funds your limit accordingly.

Other Variables

The underwriting process varies from company to company. Some issuers also check applicants' credit reports to discover the limits that exist on their other credit cards. Other agencies compare different types of scores, such as the applicant's credit score and bankruptcy score, to determine how much to fund the borrower. Issuers may also consider the person's work history or debt-to-income (DTI) ratio in order to decide how much of a risk that the applicant is to them. The more credible the person's work history and the lower his or her debt, the more likely that the person is to receive increased funds.

How Cardholders Can Apply for Credit Limit Increases

Applicants are more likely to have their credit raised if they've established a record of responsible usage and repayment of any balances in full on or before the billing due date. Companies tend to re-evaluate every six months and may automatically increase applicants' credit amounts if conditions warrant. Some issuers tell cardholders that they qualify and ask whether they want to apply for increased lines of credit. Cardholders can also request an increase by showing that they have been responsible users. On the flip side, issuers tend to decrease the credit limit if cardholders fall behind in their payments, or if they exceed their credit card limits. You can check your credit limit by calling your card issuer's toll free number listed on the back of your card or by logging into your account online.

The Bottom Line

Credit card companies determine an applicant's credit limit through a process called underwriting, which varies from company to company but, generally, includes computing factors, such as the applicant's credit score, history of credit card performance and income level. Cardholders can raise their credit limit by paying on time and keeping within their credit limit. Experian PLC (EXPN.L) recommends that borrowers increase their credit level, but that they use only a small amount in order to polish their credit scores.