The complex underwriting process used by credit card companies to determine your credit limit is based on mathematical formulas, additional testing, and analysis. The exact details of the procedure are kept confidential since it is how the company earns its revenue. The main issue is that this method of calculation aids the business in determining who to approve, at what rate, and under what limit. The greater the credit limit, the more the lender expresses confidence in the borrower’s ability to repay the debt.
Here are the basic guidelines issuers follow when calculating their credit amount:
What is a Credit Limit?
The amount of credit offered to cardholders by a card issuer is known as a credit card limit. A credit limit, also known as a credit line, is established when an application is accepted based on the customer’s creditworthiness and this limit may rise over time with responsible card use. Customers can also ask for gradual increases in their credit lines to better suit their needs.
How Credit Card limit is determined by the banks?
When you apply for a credit card, your bank decides your credit limit. Multiple factors are taken into account to achieve this. These consist of:-
- Your annual income
- Your age
- Your employment status
- The total credit amount in your name
Two key elements determine the credit limit and they are:-
- Your credit history
- Your credit score
If this is your first credit card or if you have no credit history then you should typically expect a low credit limit. This is because the bank is unsure whether or not to take a risk on you. The good news is that a low credit limit does not last for an extended time. If you use it often and pay your bills on time and in full, the bank will offer to extend the credit limit on your card, but only if you request it.
For example- If your bank provides you with a credit card with a limit of Rs. 50,000, you are not permitted to spend more than this sum in a single transaction. The credit limit is determined for each customer based on eligibility depending on the type of credit card.
Why does your credit score affect your credit limit?
Your credit limit is based on a variety of factors, but your credit score is quite important. The range of a 3-digit number credit score is 300-900. This number is used by banks and credit card providers to assess your creditworthiness. The greater the score, the better it is.
A high credit score indicates to the lender that you are responsible when it comes to handling credit. It shows the history of your credit repayment in the past. A high credit score is preferred by credit card providers since it reduces risk. Thus, a high credit score enables you to obtain a card with a higher credit limit.
Your credit limit is also significantly influenced by a factor other than your credit score. It is the credit utilization ratio.
Conclusion
Your credit card’s credit limit is the highest balance that has been authorized by the firm that issued the card. By establishing a credit limit, the bank restricts your ability to use the card for purchases. The factors used by various credit card companies to determine the credit limit that will be given to a specific user may vary. The two main variables that affect a card’s credit limit are the credit score and credit utilization ratio. Knowing what determines your credit limit will help you to use your card wisely and make informed decisions.