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 his or her debt. Here are the basic principles that issuers use to determine your credit amount.
Cards With Preset Amounts
Some companies like to keep it simple. They offer applicants a variety of credit cards that come with predetermined amounts. Choices may include the run-of-the-mill green card with a $1,000 limit, the gold card with a $2,000 limit and the elite platinum card with the $5,000 limit. Applicants may choose the platinum card, but the credit score and income level that determine whether the company approves the borrower for that, or any, card. The company wants applicants to repay their debts, so its assessment rests on the person's credit history. If the company is sufficiently impressed, then it may even raise the card's predetermined amount from 10 to 20% in order to reflect the borrower's credit rating.
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.
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 Increased Funds
Applicants are more likely to have their credit raised if they've accumulated a record of making regular purchases on their card each month and repaid their balance in full on time. Companies tend to re-evaluate every six months and may automatically hike applicants' credit amounts if they deserve it. Some issuers tell cardholders that they qualify and ask whether they want to apply for increased funds. Cardholders can also request an increase and prop their request 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 limit by calling your company, or by logging into your account.
The Bottom Line
Credit card companies largely determine an applicant's credit card limit by 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.