When financial institutions finally approve your credit card application, they will then proceed by giving you the maximum amount you can borrow from your account. Also known as the credit limit, credit analysts will analyze your financial capability and impose a limit on your account based on their findings.
When discussing about credit limits, people often ask two questions regarding the maximum amount you can borrow with your credit card. The said two questions are:
1. How much should be your credit limit?
2. If you already have a credit card, how can you increase your limit?
So how do banks come up with your credit limit? Do you just win the lottery and get a high credit limit in the beginning? Or do they come up with numbers based on your financial health and other factors?
To begin with, banks have different policies regarding the imposition of credit limits. However, all of them base your credit limit on the following factors:
1. Income. Your income is one of the biggest deciding factors in terms of getting your credit limit. Since it is your means to pay off your balance after you make purchases, credit analysts will pore over your income and how you spend it on a monthly basis. For instance, if you make more money, banks will assume that you can carry a card with a higher limit. To know how much your income is, banks will go over your financial records such as tax records, payslips, and other documents that will indicate your income.
2. Credit score. A credit score is the summary of your credit record at a given period of time. The said score commonly includes elements like your credit payment history, your debt-to-income (DTI) ratio, age of your credit accounts, types of credits used, and existing credit status. To investigate a cardholder’s credit score, banks will enlist the aid of third-party credit bureaus for transparency. While there is no central credit bureau in the Philippines, there are several companies that provide credit score investigation services such as the Credit Management Association of the Philippines (CMAP), TransUnion, and the BAP Credit Bureau, Inc.
With the said factors, banks come up with a credit limit that is both suitable for your monthly income and based on your financial accountability.
If you think that your credit limit is not enough, or you think you deserve a higher credit limit, then by all means you can talk to your bank to bump your credit ceiling. However, there are several things you have to consider when you want your credit card issuer to make the adjustments to your spending limit. To have a higher chance of getting your new credit limit approved, you must first meet the following criteria:
1. Your income has increased, which means that your ability to pay off your balance has also increased with it.
2. You pay your credit bills on time, as this increases the confidence of the issuer on your capability to settle your balance.
3. You have been using your card for quite some time and you feel like getting a line increase is in order for you.
4. You have an impeccable credit history, i.e. you settle your debts at the shortest possible time and you have no arrears whatsoever.
5. Your credit score increased because of the way you handle your finances.
If you think that you’ve met the said requirements, then you can make your case and go to the bank for an increase in credit limit.
While having a higher credit limit is good for your credit score, this does not mean that you have more purchasing power. Striking the right balance between building credit and avoiding debt.