How Credit Card Companies Determine Credit Limit

Credit card companies determine your credit limit through a process called underwriting, which uses mathematical formulas to assess your credit quality. Each company has their own propriety way of underwriting to decide who to approve, at what rate, and at which credit line limit.

The higher the credit limit, the more risk the company assumes. So card issuers provide higher credit lines to more trustworthy borrowers, or those with higher credit scores, higher incomes, and other signs of financial reliability.

Here are the basic factors credit card issuers consider when determining your credit limit, as well as a few strategies for increasing your credit limit.

What is a Credit Limit?

A credit card credit limit is the amount of credit that a card issuer extends to a cardholder. This credit limit, also called a credit line, is established once an application is approved based on the customer’s credit quality. A credit card company will take into account factors like your current debt obligations, your history of repayment, your credit score, and your income.

Most credit cards have a preset credit limit. This means that once the issuer determines your credit quality they will assign a set dollar amount of outstanding balances you can have on your account for new purchases and/or transferred balances.

Typically, if you make a purchase when your card is over the limit, your purchase can be declined or you can face a fee from the credit card company. Going over your credit limit can also affect your credit score, your credit limit could potentially decline, or your interest rate could increase.

Some premium credit cards and charge cards, while not as common, have credit limits that are dynamic, meaning they can increase or decrease based on your spending needs and credit card management. However, if you anticipate a large purchase, the dynamic credit line can usually accommodate spending that is out of pattern since they have more flexibility.

What Affects Your Credit Limit?

Most companies check your credit report and gross annual income level to determine your credit limit. Factors that issuers are likely to consider include your repayment history, the length of your credit history, and the number of credit accounts on your report.

These include mortgages, student loans, auto loans, personal loans, and other credit cards. Issuers also check the number of inquiries for new loans on your credit report, as well as negative factors such as bankruptcies, collections, civil judgments, or tax liens.

The underwriting process varies from company to company. Some issuers also check applicants’ credit reports for the limits on their other credit cards.

Other agencies compare different types of scores, such as the applicant’s credit score and bankruptcy score, to determine how much to fund the borrower. Issuers may also consider the your work history or debt-to-income (DTI) ratio to decide how much of a risk you are. The more credible your work history and the lower your debt, the more likely you are to receive increased funds.

How to Increase Your Credit Limit

You are more likely to have your credit limit increased if you’ve established a record of responsible usage and repayment such as by paying any balances in full and on or before the billing due date.

Companies tend to re-evaluate every six months and may automatically increase applicants’ credit amounts. Some issuers notify cardholders that they qualify for a limit and ask whether you want to apply for it. Cardholders can also request an increase.

On the flip side, issuers may decrease the credit limit if you fall behind in their payments, or if they exceed their credit card limits. You can check your credit limit by calling your card issuer’s number that is typically listed on the back of your card or by logging into your account online.

The Bottom Line

Credit card companies determine an applicant’s credit limit through a process called underwriting, which varies from company to company but, generally, includes taking into account your financial factors, such as your credit score, history of credit card payments, and income level. Cardholders can raise their credit limit by paying on time, paying more than the minimum payments, and keeping within their credit limit.