Every time you open a new line of credit – either via a new credit card or personal loan – you’re given a credit limit. This limit is the maximum amount of debt you can accumulate with that particular lender, at least on that particular account. But how exactly do lenders determine your credit limit, and is this account maximum arbitrary?
Let’s take a look at the factors that lenders will take into account when calculating the credit limit that you’re offered on a new line of credit, and how you can snag a higher one.
Your Credit Report
Any time you’re applying for a credit-based product, you can expect the potential lender to pull your reports from the credit bureaus. As expected, this is a wealth of knowledge for the lender. As such, it can have an impact on not only your offered credit limit, but also on whether you’re approved in the first place.
Your credit report will give the lender an idea of your past creditworthiness. Do you have late payments on your report? If so, how long ago were they and is there a pattern?
Do you carry around a lot of credit and/or are you a monthly-minimum-payment type of borrower? If so, lenders may be less willing to give you a very large credit limit, for fear of default.
The things shown in your credit report tell a lender a lot about how you manage your past and present accounts. It also plays a very large role in the credit limit they will extend.
Your Credit Utilization
One specific thing that lenders will be scanning your credit report for is your credit utilization. If you are carrying around high levels of debt – at least in regards to the credit limit on each account – then you are considered to be more of a risk. As such, you might find that the credit limit you’re offered is lower than it would have been otherwise.
Your credit utilization is the ratio of your account balance to your overall credit limit, and can fluctuate throughout the month depending on when your lender reports to the bureaus. Even if you pay off your balance in full each month, you could still have a high utilization reported. If you’re applying for a new credit product and want to keep your utilization low, pay off your balance as soon as your statement closes, or even pay it down throughout the month so that a (relatively) high balance is not reported to the bureaus.
How much money you make is not shown on your credit report. In fact, a lender probably won’t be able to find that information anywhere other than on your application, when you give the number to them. But that doesn’t mean that your income doesn’t play a large role in your offered credit limit.
It’s important to lenders that you be financially capable of repaying your debt, regardless of how much credit they extend your way. If you are already maxed out in regards to debt repayments and other monthly expenses, lenders won’t be keen on offering you even more ways to spend money.
They will ask you for your income and monthly expenses, and they will also cross-reference this against your credit report (which shows your minimum monthly payments). If it looks like your budget is already stretched too thin, they may not give you much of a credit limit at all.
Even if you don’t carry around debt or have high monthly payments, your income could still limit the amount of credit you’re extended. In fact, most lenders want to avoid offering you additional credit if you have as much available credit as your annual income (or more than). The ability to go out and spend more than you make in a year is a liability, and lenders want to avoid that situation.
The good thing about the role that your income plays in your credit limits is that when your income rises, often so do your limits. You can simply call your lender and tell them that your salary has changed. They may ask you if you’re interested in a credit limit increase, or they might offer one automatically.
Your History With the Lender
Some lenders have internal policies that dictate how much credit they will offer to borrowers. This might mean offering a specific amount for new customers and then increasing over time, or it might even mean a total cap on the amount of credit you’re given.
Lenders like American Express are notorious for giving cardholders somewhat-low credit limits. However, as early as 60 days after you open the account, you can request a limit increase up to three times your current limit. After that, you can request another increase every 90 days.
Different lenders have their own different policies. Be sure to read up on yours to know the best ways to increase your credit limit.
Factors Out of Your Control
Your credit limit isn’t always up to you. As mentioned above, there may be company policies in place that dictate how much credit you can be given, and when you’re eligible for an increase. There may even be a company-wide maximum that affects everyone.
For instance, some secured credit cards have a maximum that’s imposed on all customers. No matter your credit score, history with the company, or income, the maximum credit limit still applies to you.
Credit limits are also dynamic, and can change any time. I’ve requested an increase on a card before and been denied, only to have my limit randomly bumped up a few weeks later. You never know what the issuer is looking for, what policies have changed, or which milestones you’ve met. Just know that you can’t control when or how limits are increased.
Whether you want a higher credit limit because you need it or simply because you want it, it can be frustrating to obtain. Each company has their own proprietary calculations to determine the line of credit they extend, but the factors above are almost always taken into consideration. By knowing where you stand financially, you’ll be in a good place to not only request the credit limit you need, but get an increase down the line when the time is right.