What are Credit Limits?

If you want to own a credit card, one of the terminologies that you will encounter is credit limit. By definition, this is the maximum amount that the credit card company will permit you to borrow without penalties. If you exceed the agreed amount, you will have to pay for an over limit charge. In some cases, the creditor will increase the interest to the default rate once you go beyond the credit limit.

Benefits of Credit Limits to Creditors

The credit limit is often seen by credit card firms as a risk that they are willing to take on the accounts. Nevertheless, there are quite a number of advantages that the limit provides to the creditors. First is that this enables them to free up more time for other management tasks. Additionally, this quickens the sales procedures and even improves collection efforts and activities. Credit limits are usually used to monitor accounts, enabling creditors to easily keep track of their clients.

How Creditors Set the Credit Limits

Some customers may not be too happy with their credit limit, particularly when it is lower than they expected. Creditors, however, often base their decisions on how much limit they can give to card applicants based on certain criteria. The two main criteria that are taken into account during the credit limit designation include the gross annual income and the credit score of the customers. Other companies reflect on their own exposure as well.

Aside from the mentioned aspects, there are also techniques used by creditors to find out how to set the credit limit of a customer. One is through trade references, where they can typically compare the total High Credits received by the applicant. Another is through bank references, where they usually take the line of credit amount established by the customer with the bank. In general, if the credit company sees that it is an unsecured line, they will set a higher credit limit. This technique, however, is a little sketchy because most banks are secured creditors with firm remedies when customers default on their payments or accounts.

Limits Can Change

If you find your credit limit low, you can help increase it. Limits may rise and fall depending on how you spend using your credit card. A surefire method of gaining higher limits is to guarantee that you do not reach your credit limit. You should also be able to make payments on the credit balance. Similarly, if you already have a high limit and you regularly spend without paying more than the smallest payments on the balances, the creditor will most definitely lower your limit.

Credit limits exist for a reason. Be sure you are careful enough not to exceed on your limit. If you feel the need to increase it, contact your creditor immediately.

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