How Do Banks Set Credit Limit on Your Card?
A credit card is a payment card issued to users with a limited line of credit, which they can use to purchase goods or services based on the holder’s promise to pay for these purchases.
A credit card is different from debit cards and charge cards in that a debit card is funded via immediate withdrawal from the user’s bank account and charge cards require users to pay off their balance in full before the end of each billing cycle.
If you want to know what factors affect credit card limits, this article will help you with everything you need.
Lenders want to ensure you can afford the payments and interest on your credit card before approving it. That’s why they review your income, employment status and other sources of income before issuing a new credit line or increasing an existing one.
Banks also uses your annual income to calculate how much debt you can afford versus how much money you need to pay off your monthly statement balance each month (the minimum payment).
The SoFi experts state that “credit issuers will also consider your existing debt obligations when deciding your credit limit. Specifically, they will look at your debt-to-income ratio (DTI), which compares the amount of money you owe each month to the amount of money you earn each month. Your debt-to-income ratio can also affect factors like whether your interest rate is above or below the average credit card interest rate.”
Previous relationship with the bank
The bank also looks at your credit history with them. If you have been a good customer and have never defaulted on any payment, it’s more likely that they will increase your limit. On the other hand, if you haven’t had good payment history or did not pay back the loans in time, then it is less likely for the bank to give a higher credit limit.
The banks also look at how much money is available in your account as well as other similar factors before deciding whether or not to give out a higher limit on your card.
For example, if there are few transactions done by customers using their cards then it shows that there isn’t much demand for those cards and thus banks feel safe keeping the amount low so that they don’t lose money if something goes wrong with payments made by customers utilizing those particular cards.
It’s important to remember that your credit limit isn’t set in stone, but it could take several months or even a year for your issuer to review and adjust your credit limit based on your financial habits.
If you use the card responsibly (paying off bills on time, keeping balances low) then you may be able to request a higher credit limit within 12 months of opening an account. On the other hand, if you don’t manage it well and miss payments or carry high balances then they might reduce the limit instead.
If you have a good history of paying back your credit card debt, you will be eligible for a higher limit. But if you have a bad history of paying back your credit card debt, the bank may reduce or even cancel the limit they had given to you earlier.
The second factor that affects how banks set the credit limit on your card is repayment capacity. This refers to how much income or money you earn each month and how freely this amount can be used up without causing financial hardship. The purpose of calculating repayment capacity is to ensure that the borrower can pay off their debts comfortably without falling into further debt traps in future months.