There is always a limit to many good things or at least things considered good. Such is the case with credit card companies and these limits are set to prevent people from borrowing more than they can pay.
A credit card limit indicates the maximum amount you can borrow for example on a monthly basis. Credit card companies have to set the right limit that will encourage spending while preventing too much debt accumulation. Note that a higher credit card limit allows you to exercise more spending power, making it easier for you to easily make ends meet.
Card companies consider four main factors when determining credit card limits. They have to evaluate these factors before they approve a card.
- debt history
A credit card company assesses your debt history which allows them to know whether you regularly pay your debt. They will thus analyze your current and previous credit card accounts to determine how you faired. Chances are that you will receive a higher credit limit if you have a good debt history and a lower one of your credit history is sketchy. Card companies use credit reports coupled with scoring models to weigh in on the level of credit they will allow you.
- Credit risk
Card companies also use a credit report to assess credit risk which they then use to determine interest rates and credit limits. You are considered a low-risk individual if your credit history shows that you clear your debt on time. They use this data to determine whether you deserve a higher credit limit.
- Financial capacity
Credit card companies also assess your income level, as well as your existing debt to determine your financial capacity. They call it the debt-to-income ratio or DTI. A higher income means you can pay your bills more easily while a lower income means you might struggle to clear your credit card debt. Higher income means your financial capacity supports your ability to clear debt while lower financial capacity means less financial muscle to clear debt.
Credit card companies use a combination of these factors to determine the credit limit. One might have a high income but if their spending is out of control, then they cannot be given a high limit. Credit history indicates the financial discipline levels, and the higher the financial discipline, the more likely you are to secure a higher limit.