How your credit limit is determined
Highlights
- A credit limit is usually determined by reviewing factors like credit score, credit history and debt-to-income ratio.
- A higher credit score and positive credit history may cause a lender to set a higher credit limit.
- Credit utilization and credit mix also tend to be considered when lenders determine a credit limit.
Applying for a credit card can be an exciting time. You might be looking forward to promotional offers, rewards opportunities and various perks and benefits of a credit card.
Your credit limit is an important aspect of your account. In this article, we’ll review the factors involved in determining a credit card limit.
How is your credit limit determined?
A credit card application review can vary from lender to lender, but one aspect of an approval is the same: to determine the credit limit. Although credit card issuers and products differ, similar information is evaluated when determining a credit limit.
Income, debt and expenses
The relationship between income and expenses can help a lender predict a borrower’s ability to manage or repay debt. More specifically, there’s a ratio between a borrower’s monthly debt payments and their gross monthly income called the debt-to-income ratio. The ratio a given lender prefers, as well as how it affects the credit limit, varies by lender and sometimes by credit card.
Credit utilization
Credit utilization is a figure calculated based on a person’s current credit balances in relation to their credit limits. This figure may help evaluate risk when lenders are reviewing a credit card application and setting a credit limit. Low credit utilization — usually 30% or lower — may signal to lenders that an applicant doesn’t overspend and result in a higher credit limit.
Payment history
This is another factor used to help a lender assess risk when evaluating a credit card application. Payment history can indicate an applicant’s ability to repay past or existing debt. Positive payment history includes little to no incomplete, late or missed payments on credit cards and other lines of credit. As a result, positive payment history may result in lenders offering a higher credit limit.
Other factors that determine credit limits
Maybe you pieced it together, but the factors that help determine your credit limit are similar to the factors that affect your credit score. All things considered, you could say that your credit score and credit report are the main factors card issuers use to determine credit limits.
- Credit score: This is an indicator of your ability to repay debts and be financially responsible. Higher scores may result in higher credit limits. Chase Credit Journey® is a free tool you can use to monitor your credit score and access tips to help improve it.
- Credit report: This is a detailed compilation of your credit accounts and activity. Information about your payment history, credit history and credit mix are included on the report. All of those are important factors to lenders as they decide on your credit limit.
While lenders use these factors to help determine a credit limit, they may also be used in periodic reviews of your account. Lenders might conduct these for several reasons, including to assure them that your existing credit limit fits their criteria. The result of one of these reviews may be a credit limit increase or decrease.
How your credit limit may affect your credit score
In some cases, a credit limit increase could improve a credit score. This is because of your credit utilization ratio, which is a figure based on all of your available credit, not just one card’s limit. If a credit limit increase lowers your credit utilization ratio, your credit score might see an increase after a period of time. That said, it’s important to consider the effects of a credit limit increase on your credit score whether you request one or your lender offers one.
