Your credit card limit: the maximum balance allowed
What’s your credit card limit? It’s the maximum balance allowed. Chances are it’s high enough – perhaps excitingly high, in the many thousands of dollars -- that you feel confident you won’t ever max out. Don’t let it go to your head: Quite likely, you have the available credit limit you do because it was used by the card issuer as a marketing ploy to get you to sign up.
Not a guide to responsible spending
Your credit card company won’t make a profit if you don’t use the card to borrow money and pay back the loan, over time, with interest. It has been to a card company’s advantage, at least until recently, to set the limit high, often pie-in-the-sky high. You must not interpret your credit limit as a guide to what’s responsible or realistic.
Video: How to Increase Your Credit Card Limit
Tough times, falling limits
During this economic downtown, banks and other credit card companies have been not raising but lowering consumers’ credit limits, by as much as half. The financial crisis has left creditors with little money to lend, and the percentage of people who are falling behind on their payments is rising. If your credit history shows you to be a higher-than-average risk, you could see a sudden shrinkage of your credit limit. Even consumers having a superb credit history are seeing their limit cut. So what? You never planned to borrow all that money anyway.
Hurting your debt-to-limit ratio
By borrowing as you have in the past while your credit limit shrinks, you’ll increase your debt-to-limit ratio (the amount you spend each month divided by your credit limit), and this could harm your credit score. If your limit drops from $20,000 to $10,000 and you keep spending $5,000 a month as usual, your debt-to-limit ratio jumps from an acceptable 25% to an unacceptable 50%. Lenders may start denying you loans or charging you increased interest rates. To prevent this, you can do one of two things: (1) cut your spending; (2) try to have your credit limit increased.
Factors lenders take into account
Credit card companies don’t divulge the exact process they use to set credit limits; however, two known components are your self-reported income and your credit score. This number (also known as a FICO score) represents your standing as a credit risk. It is composed of data collected on these and other factors:
- > Your credit history.
- > The amount you owe to all your creditors.
- > The types of credit you have and use.
Beyond that, credit card companies factor in other variables. For example:
- > Were you ever late making a payment?
- > Have you used a credit card for cash advances?
- > Do you pay your account off in full every month?
Even where you shop can have an effect on the limit that is set.
Video: Are Credit Card Companies Using Behavior Profiling?
Increasing your credit limit
A credit limit increase may be helpful if:
- > You're planning to make a large purchase. (This could include a sailboat or an investment opportunity.)
- > You want to transfer balances from several credit cards into one to simplify repayments.
- > You want to have increased funds available in the form of a cash advance for emergencies.
If this applies to you, simply call first and then write to your credit card issuer and explain why you would like to have your limit raised. If the company believes you are planning to borrow more than your record shows you have in the past and are capable of paying off the loan, it will probably consider an increase.
Updating income information
You may need to update your income information. Some banks do not require documented proof of income from borrowers who have excellent credit profiles and high credit scores. If you do need proof, use your W-2. If you plan to include child support or alimony in your total income, be sure you have paperwork to prove that this income is reliable and will continue through the foreseeable future. If you are self employed or
have non-typical income, show them a copy of the prior year’s taxes.