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How a Creditor Determines your Credit Limit

Credit Score

Have you ever wondered why you have the credit limit that you do?

Whether you were approved for less – or more – than you thought, you should know that there is actually a formula that credit card companies use to determine your credit limit.

• The first thing a credit card company will do when you apply for a credit card is look at your credit score. Your credit score (often referred to as a FICO score) is a clear indication of how you have managed your debts in the past. The scoring used in a credit score also predicts your ability to repay loans in the future.
• Credit card companies, after they look at your credit score, will then look at your debt levels and your income. Your debt levels, also commonly referred to as a debt-to-income ratio, is a common reason why many people, although they may have a gleaming credit score, will have lower credit limits. It is the credit card company’s way of protecting credit card customers from more debt than they can financially handle.
• In addition to looking at all of the above factors, a credit card company will also examine your current outstanding credit, or the amount of credit on other loans and credit cards that you have open and available. For example, if a credit card company notices that you have another credit card, but that it is maxed out, this may raise a red flag that you are taking on more debt than you can handle; as a result, your credit limit may be significantly lower than your previous credit card.

Many times, your credit card company will automatically raise your credit limit if you have established a good track record of punctual payments. However, it is also important to point out that creditors are also able to lower your credit limit if you show a steady of history of late payments.

The best thing you can do maintain a good credit score and ensure that you are eligible for higher credit limits is to make your payments on time, each and every month, and to keep your spending in check and not top out your credit limit.

A Useful Website for Cardholders

Credit Card Types

The Federal government has a great website that could provide you with plenty of useful information regarding credit cards.

This new site (found at www.federalreserve.gov/creditcard), which is maintained by the Federal Reserve Board, has been launched to provide consumers with a basic guide to understanding the credit card industry.

Some of the useful features on this new website include:

• An Interactive Tools and Features section, which includes an area about learning more about a credit card offer you may have received. Located in an easy-to-open PDF file, this handy link allows you to better understand the terms and features of any credit card offer. Also located in this section is a guide to understanding your statement.

We think this section is particularly useful, as it breaks down all of the legal credit card terms into easily understandable language so that you can better navigate your monthly credit card statement.

Finally, the last section of this Interactive Tools and Features section is a Pay it Off calculator, which allows you get an estimate of how long it will take to pay off your credit card balance, given your interest rates and monthly payments.

• The Federal Reserve also has a great section on their website that allows credit card customers to watch their PSA; this video essentially teaches consumers how to navigate the credit card process and get the most out of their credit cards.
• The What you Need to Know: Credit Card Rules section is designed to educate and inform consumers on the new credit card legislation and how it can change the way your credit card company handles your credit card account.
• A small section called 5 Tips for… on the Federal Reserve website provides easy-to-follow steps for doing a number of things, such as “Improving your Credit Score” and “Getting the Most from your Credit Card.”
• The Federal Reserve credit card website also features additional sections that allow you to learn more about: options, interest rates, fees, lost or stolen credit card, billing errors, general complaints and managing your credit.