How Do Credit Card Issuers Determine Credit Limits?
Credit card issuers consider multiple factors including your income, debts and payment history.
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Credit card issuers will never tell anyone exactly how or why the credit limit on their card was set at a given level. The formulas they use are trade secrets. But we do know the main factors that go into setting credit limits, including your income, your expenses and your existing debt, as well as your credit score and credit history. Credit limits can also be affected by larger factors completely out of your control.
Income, expenses and debt
The Credit Card Act of 2009 requires lenders to take your “ability to pay” into account when approving you for credit. This applies not only to whether they allow you to open a credit card in the first place, but also to how much credit they will extend to you. Your credit limit, in other words.
The law says ability to pay is determined "based on the consumer's income or assets and the consumer's current obligations." This is why credit card applications always ask for your income and often ask for information about monthly bills that don't appear on your credit report, such as rent or alimony obligations.
Issuers will look at your credit report to see how much debt you're already carrying, including on installment loans as well as on other credit cards. A key data point here is your debt-to-income ratio, which is how much you have to pay on your debt as a percentage of your income. If you have monthly income of, say, $5,000 and monthly obligations of $3,000, then your debt-to-income ratio is 60%.
All other things being equal, the higher your income, the higher the credit limit you're likely to be approved for. But if you already have debts that eat up at a large portion of that income, a credit card issuer will be reluctant to offer a high credit limit.
The credit limit an issuer will offer you can also be influenced by your unused credit. You might not actually be carrying much debt, but unused available credit on other accounts represents the potential for debt, so it might factor into the equation in some instances. And when applying for a card from an issuer where you already have a card, the credit limit on the new card might be influenced by how much available credit you already have with that particular issuer.
Credit score and credit history
Credit card issuers will be more willing to grant you a higher credit limit if you have a history of paying back what you borrowed on time.
They can see your track record by looking at your credit reports provided by the three major credit bureaus (TransUnion, Equifax and Experian). These companies compile the information that forms the basis of credit scores. Credit scores measure the risk of lending people money and can play a role in assigning your credit limit. Higher credit scores can help you qualify for higher credit limits.
Data compiled by the Consumer Financial Protection Bureau shows a fairly strong correlation between credit scores and credit limits. These figures are from 2020, but they reflect a pattern that has held for years:
Credit score ranges | Average credit line on new general purpose credit card accounts in 2020 |
|---|---|
Super-prime (scores of 720 or greater) | $7,842 |
Prime (scores from 660 to 719) | $3,814 |
Near-prime (scores from 620 to 659) | $1,788 |
Subprime (scores from 580 to 619) | $865 |
Deep subprime (scores of 579 or less) | $527 |
If you have a limited credit history, it's harder for credit card issuers to evaluate you. As a result, they might be more cautious and set a low initial credit limit until you can prove that you're able to manage credit responsibly.
Factors beyond your control
In addition to your own specific situation, issuers consider larger economic factors. The general condition of the economy plays a role in issuers' underwriting standards. When times are bad, issuers have been known to tighten cardholders’ credit limits. Or the economy could be doing just fine, but the issuer has decided to limit its risk for other reasons, which is reflected in lower approved credit limits.
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