Now with the changing trends, having a credit card has become a fashion among youngsters. But you must have asked yourself how credit card limit is decided. Well, experts at CroxTimes will provide the exact answer to that question.
Credit card companies determine credit limits through a process which is known as underwriting, which uses a mathematical formula to assess your credit limit. Each company has its own way of doing underwriting to decide who to approve, at which rate, and at what would be credit limit.
The higher the credit card limits the more risk the company assumes. So, Card issuers provide higher credit lines to more trustworthy borrowers or those with higher credit scores, higher incomes, and other signs of financial reliability.
How Credit Card Limit is Decided
What is Credit Card Limit?
A credit card limit is the amount of credit that a card issuer extends to a cardholder. This credit limit, also a credit line is established is approved based on the customer’s credit quality. A credit card company will take into account factors like your current debt obligations, your history of repayment, your credit score, and your income.
Most credit cards have a pre-set credit limit. This means that once the issuer determines your credit quality they will assign a set dollar of outstanding balances you can have on your account for new purchases or transferred balances.
Some premium credit cards and charge cards, while common, have credit limits that are dynamic, meaning they can increase or decrease based on spending needs and overall credit card management. However, if you anticipate a large purchase, the dynamic credit card line can usually accommodate spending that is out of pattern since it has more flexibility.
Also Read- Reasons Why Your Credit Card Gets Declined
What Affects your Credit Card Limit?
Most companies check your credit report and gross annual income level to determine your credit card limit. Factors that issuers are likely to consider include your repayment history and the number of credit cards shown on the report.
Well, these include student loans, auto loans, personal loans, and other credit cards. Issuers also check the number of inquiries for new loans on your credit card report and negative points as well such as bankruptcies, collections, civil judgments, and other things.
The underwriting process varies from company to company. Some issuers also check applicants’ reports for the limits on their other credit cards which are being used.
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How to Increase your Credit Card Limit?
You are likely to have an increased limit if you have established a record of responsible usage and repayment such as paying any previous balances in full or before the due date.
Companies tend to re-evaluate every six months and may automatically increase the credit limit, it all depends on your repayments. Some issuers notify cardholders that they qualify for a limit and ask whether they can apply it. Cardholders can also request an increase.
Also Read- How Do Credit Card Companies Make Money
How Credit Card Limit Is Decided
So how credit card limit is decided? Well, certain factors affect in determining the credit card’s limit like your credit history, timely repayments, your other debt, and other financial factors as well.
Is a High Credit Card Limit Good?
The only advantage of having a high credit card limit is that you get more money to spend. But with a higher limit, there might be over expenditure. If you have spent more than you can actually afford then you might get yourself into the debt trap.
Final Words
In deciding the credit card limit, an applicant’s documents undergo a process known as underwriting. This varies from company to company. Generally, financial factors are taken into consideration such as your credit score, and history of credit card payments. Cardholders can raise their credit limit by paying the dues on time and staying within their credit card limit.
Also Read- How Credit Card Interest is Calculated
FAQ’s Related to How Credit Card Limit is Decided
On what basis is credit card limit decided?
The main factors that are being taken into consideration in deciding credit card limit are your income, your credit score and credit history.
What is the limit on a 50 000-salary credit card?
If you are earning 50,000 monthly then there is a possibility that you can credit card having limit upto 1 lakh or 1.5 Lakhs.
What is the limit of credit card for 1 lakh salary?
Normally the credit card limit would be 2X then your salary. So, if you are earning 1 Lakh rupees per month then you can expect a credit card having a limit of 2 to 2.5 Lakhs.
How are credit card limit calculated based on salary?
The credit companies typically uses a multiplier with your gross monthly income along with your income tax documents. In layman terms, this means if you are 50K in a month then you can have a credit card having limit of 1 lakh.
Can my credit limit be higher than my salary?
The answer to this question is a big “Yes”. Your salary decides your credit score and you can have 2X limit on your credit card than your monthly salary.
