Credit limits on credit cards are so much more than just numbers. They affect your credit score, your standing with credit card companies, your money management, and can even affect your insurance rates. You may wonder how credit limits are determined and just how often a bank will raise your credit limit.
There are some basics to consider that may answer these questions and help you as you strive to manage your credit in a responsible fashion and get credit cards with the highest limits possible.
How a Credit Limit is Determined
Your credit limit is determined by several factors. The most important aspect that a credit card company will take into consideration is your credit history. If you have a history of late or missed payments or a history of going over your limit, the company will start you off with a low limit for a period of time to better determine your financial responsibility.
They also look at how many credit cards you have open and how close you are to the limit on those. You may think that because you are under the limit, you are fine. This is not true.
Companies will look to see if you have used 50% or more of your available credit and carry that amount as a balance. This is considered poor financial management and if you apply for another card, your limit will be low.
Another factor taken into consideration is your income to debt ratio. Having $10,000 in debt may seem like a lot, but if your income is $10,000 a month, it isn’t a large amount of debt to have. That is why companies don’t just look at your debt totals but at your debt as it relates to your income. If the two are close together or the debt exceeds the income expect a small credit limit or to be turned down altogether.
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Two Ways Credit Limits Increase
There are two ways that credit limits are increased; either by your request or by the bank independent of your request. Let’s look at why you may request an increase. Chances are if you want an increase just because you need to purchase something, you will be turned down. You have to have a reason that has staying power such as a raise. If your income increases, you will most likely be approved for a credit increase.
Another reason you may request a credit limit increase is to do a balance transfer. This may be accepted by the company because they know they stand to benefit from the interest of your balance transfer. But if you are already very close to your limit and only make your minimum payments every month, you may be turned down. Letting the company know what other offers you have received for balance transfer may persuade them to give you the increase.
Another reason people request an increase in their credit limit is because they have had a recent pay off. If you had been carrying a balance for several months and recently paid the whole balance off, it is a good time to ask for a credit limit increase. You have proven yourself to be financially responsible by paying your balance in full and most companies will be ready to give you a higher limit.
The second way your credit limit is increased is due to the bank’s automatic limit increase system. If they see that you have had a consistent payment history, have stayed well under your current limit, or if you just paid off your total balance, the company will most likely give you an automatic increase. They want you to start spending again.
Some credit card companies will ask you if you want to increase your limit and wait for your approval. Others will just send you a notice stating that your limit has been raised. There really is no reason to say no to a credit increase.
As long as you only use 40% of your limit, an increased limit will increase your credit score.
How often a bank does this is really up to the bank, your credit habits, and the need for companies to remain relevant. If you have good credit habits your bank may increase your limit several times a year. Or, if a credit company is struggling, they may offer to increase your limit to entice you into transferring a balance.
Deciding on the Right Credit Card for You
There are many credit cards to choose from and each one will have a different credit limit depending on that particular company’s standards and eligibility. Using an online comparison tool like the credit card “Chaser” search tool on our home page can show you what different cards have to offer within your credit requirements. Having all this information in one convenient place will help you choose the card that fits your lifestyle. Get started finding the best credit cards now!
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