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Underwriting is a complex process used by credit card companies to determine what kind of credit limit they want to give you. Using a bunch of mathematical formulas, testing, and analysis, they figure out what you deserve, but no one is going to tell you how the process works.
If you’re given a higher limit it means the company trusts you more, and that they expect you to repay the debts. But let’s take a little closer look at some of the important factors.
What is Your Credit Limit?
First, let’s look at the credit limit itself. This is a set number, according to the credit card company, that you can spend on your credit card. It seems pretty easy, right? But it’s actually a little more complex, especially when you hit that limit or go over.
If you end up going over your limit you could have your card declined, which is embarrassing, but it’s the easiest result. Otherwise, you could be able to charge the amount and then get charged an over-the-limit fee. It could be up to $25 just for doing it once and if you happen to do it again? It could be as much as $35 the second time. It’s important that you know, however, that a credit card company can’t charge you over-the-limit fees if you haven’t agreed to have over-the-limit charges allowed.
Other consequences come up as a result of going over your credit limit. For one thing, your credit card company may decide to lower your limit.
For another, they may require you to increase your minimum payment because you have to pay additional fees and whatever is over your limit as well as the normal minimum.
The Factors That Affect Your Credit Limit
So, just what is actually being used to figure out your credit limit when you apply for a card or request an increase? First, the company is going to pull a credit report with your income, debt, payment history and more, to get a better idea of whether you’re financially responsible.
1. Payment History
The first thing is how well you do at making your payments. If you make late payments a lot or miss payments a lot then you’re less likely to be approved for a credit card or any kind of increase. It’s likely you’re not going to pay that money back.
How long you’ve been making those payments is another important factor, which means if you’re younger and don’t have a lot of payments made, even across multiple cards, you may not get approved. Credit card companies don’t have enough of the information they want to decide if you’re a good risk.
2. Company Guidelines
If you’ve ever applied for different cards or looked at the information you know that there are different guidelines for different cards.
You might have different types of cards offered, like a rewards card or a secured on or a cash back card. You might have different levels of cards, like a standard, a gold or a platinum. There might also be different credit limits for those cards. If you have a rewards card you might get a higher maximum limit than if you were to get a low rate card. The credit reporting bureaus are even saying that credit limits have risen from around $29,176 in 2010 all the way up to $33,371 in 2017, and they’ll probably continue to rise.
For rewards cards, you’ll generally get a higher limit if you get a platinum card than if you get a gold card. A basic card might give you only $500, but a secured one will give you however much you want to keep in the account. You can get increases with these cards quite easily most of the time.
3. Debt-To-Income Ratio
Just how much money do you have coming in versus how much money you have going out? The credit card company wants to make sure that you can pay them back, so if you have a ratio of 35% debt to income you probably have a good chance of getting what you want. If you’re at 50% or higher however, you may have a harder time getting approved.
4. Current Credit Limits
What limits have your other credit card companies put on you? No company wants to be the first one to give you a huge limit, but if someone else trusts you then they are more likely to as well.
5. Who’s Signing
If you have someone else willing to sign with you then the credit companies are going to look at their credit score as well, and use that information to decide whether you should get a certain limit.
If their score is higher it might give you a better chance to get a higher credit limit as well, since their score is tied to your spending.
6. Recent Applications
Every time you apply for any type of credit it runs your credit report, and that means you’re going to have more inquiries. The more of those you have the higher the risk you’re considered and that means you’re more likely to get a lower limit.
Spreading out your applications tends to look better to credit companies.
Okay, so these aren’t actually ‘limitless’ but they are as close as you can get in most cases. This type of card is going to give you no definite limit, but there is a floating limit that tends to vary based on how much you normally spend or how much you make or any number of other factors.
For this type of card, you’re usually not given a maximum when you apply. Instead, you’re given a minimum amount that you’re going to get. Your statement will generally let you know what the minimum is and you have a higher amount if you want to spend it.
Of course, you can contact the company themselves and seek out an even higher credit limit, but it’s important to be able to pay it back and to be able to support your request with a good credit report.
How to Check Your Credit Card Available Credit?
Are you sure you can afford to make that next big purchase? If you’re not you should check your balance before you risk the over-the-limit fees we talked about earlier.
Checking Your Balance Online: Online banking is really popular right now and for good reason. You’ll generally get up to the minute information about your charges, (both approved and pending) and about the amount of money you’re able to still spend. Plus you can do balance transfers, pay the bill and check your balance, all from your computer or smartphone.
Recent Card Statements: If you haven’t made a purchase lately or if your statement is recent enough you could check what it says about your available balance or about your total credit limit. You’ll also be able to find more about your current balance and you can check out the most recent charges. You may have to update this personally to know if you can make a purchase of a certain amount now.
Your card’s customer service: If you want you can also call the customer service line for your credit card and find out what your current available balance is that way or about your total credit limit.
Does the Limit Go Down?
For those who don’t spend the amount on their card or who tend to go over the limit or even those who don’t make payments, credit card limits can definitely go down. That’s why it’s important to check your credit limit periodically, so you know what you have available.
Should You Apply for an Increase?
If you need to lower your credit utilization ratio because it’s getting too high and affecting your credit score that might be a great reason to apply for an increase. Of course, you have to have the focus not to increase the amount that you’re spending just because your available amount went up. You still want to keep around the 30% mark for your credit utilization ratio. If you’re able to increase the credit card limit but not increase spending then getting an increase can be great for you, letting you spend what you need and still keep your balance at a good level.
Of course, if you’re going to be purchasing something major and you want to be able to put it on a card that could be another great reason to increase your credit card limit, if you’re able.