How Credit Limits Can Help or Hurt
If you think your credit limit only affects how much you can spend, think again. Here are seven things to know about how and why credit limits are set – and what it means for your credit score.
By Paramita Bandyopadhyay
Your credit score is important, but did you know your credit card limit influences it? Your credit limit is the most a lender allows you to borrow on that card. And that limit, and how much of it you spend each month, plays a big role in your financial profile.
Your “credit utilization ratio” is how much you spend each month toward your limit, plus the balance you may carry over from previous months. This ratio accounts for a large portion of your standard third-party credit bureau score considered by lenders worldwide.
The less you spend of your available credit every month, the more likely you will be to boost your credit score. This may help you borrow money more easily and get a better annual percentage rate when you do.
Seven Things to Know About Credit Limits
When it comes to your credit limit, you have choices. You can ask your credit card company to consider granting an increase or you can wait for an automatic increase if your credit card provider offers them. The following can help you understand how lenders set credit limits and steps you can take to raise your limit—and possibly your credit score:
1. Keep Spending Low
Lenders only want you to spend what you can pay back. They also want you to have money left to cover fixed expenses. Ideally, you should aim to spend less than half of your available credit limit in most months.
If your credit limit increases, keep your spending low. If your spending stays the same when your credit limit increases, your proportion of credit use drops. This can improve your credit score.
2. Different Lenders, Different Limits
All credit limits are not created equal. Each lender has its own guidelines for lending. Some lenders calculate your credit limit using your credit score. Others create a custom score, where your finances are weighted differently than your standard credit score. And some use a combination of these two approaches.
3. Track Your Debts
Another important criteria in setting your credit limit is your debt-to-income ratio. This ratio is important because it shows whether you earn enough money (income) to cover all your bills, rent/mortgage and credit lines (debts). For example, if your income is $2,000/month and you have $1,200 in debts, your debt to income ratio could be considered too high, so your credit limit likely will be low.
4. Get to Know Your Numbers
When you apply for credit make sure you provide all sources of income. Unreported income or newly disputed medical bills, for example, can influence your approved credit limit. Contact a customer service representative if you apply for a card and receive a lower credit limit than you anticipated based on your credit score and income. They can connect you with a trained underwriter who can review your situation, ask questions and potentially adjust your credit limit based on any new information.
5. Check for Changes
You can request to have your credit limit reviewed, but lenders can only increase your limit if your credit score improves, income goes up, debt goes down or all of the above. It also is essential to have a timely payment history on any current debts you might have. If you request a credit limit increase, have this information handy:
- Housing status (own or rent?) and monthly payments
- Length of time at current residence
- Employer name and length of employment
6. Time It Right
If you call to request a credit limit increase or submit a request online, you will usually know the decision pretty quickly. But don’t plan any big purchases until you’re sure your limit has changed.
7. What Goes Up Can Come Down
Requests for credit limit increases peak around the holidays. PNC generally receives more requests for increases, but plenty of customers request credit line decreases. These usually are from parents who add teenagers to their credit card accounts, but want to limit their spending.
Your credit limit and credit score are closely tied. Your score helps lenders set your limit – and your limit, along with your spending, are factors in your score.
With the two so intertwined, it’s important to stay well below your credit limit if you want to avoid hurting your credit score.
Paramita Bandyopadhyay is general manager for consumer credit cards at PNC and has 18 years of experience in the payments industry.
PNC’s Paramita Bandyopadhyay says spending within your credit limit is a big factor in credit scores
When you apply for a new credit card, the issuer follows a two-step process:
- Approval – Lenders look at your credit bureau reports to check for major red flags, like delinquent bills or bankruptcies
- Credit Limit Setting – Lenders look at more detailed info like your debt-to-income ratio and credit score
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