Have you ever wondered why your interest rate is a particular amount or why you were turned down for an auto loan? You may be surprised to find that your credit limit is to blame.
How It Is Determined
Many factors impact your credit limit, such as the following:
- Credit score. Your credit score in and of itself is determined by your credit card utilization rate, on-time payment history, age of credit history, total credit accounts open, number of hard credit inquiries and number of derogatory marks.
- Debt-to-income ratio. While your personal income certainly has an impact on your credit limit (the more you earn, the more credit companies believe you will be able to pay off) the bigger issue is your DTI ratio. "You may have a high income, but if you're also in a lot of debt, you may not be able to pay off a maxed-out credit card. As a result, lenders may not want to risk giving you a high credit limit," says credit expert and consumer advocate Bethy Hardeman in U.S. News & World Report.
- Missed/late payments (specifically on the particular account in question). "If you've made some late payments or missed a bill, your issuer may find that reason enough to decrease your credit limit," Hardeman says. "A lower credit limit could inflate your credit utilization rate, one of the most important factors of your credit score."
On the other hand, the fact that your credit limit can fluctuate can be positive as well. If you have a history of using your credit card responsibly, the issuer may be inclined to raise your limit after a while.
What It Impacts
While many things affect your credit limit, your credit limit also affects many things:
Being aware of the impacts of and on credit limits will ensure that yours will stay in the most effective and efficient range possible
- Interest rates. Debt utilization (or your debt-to-limit ratio) is a key component of your credit score and can be a red flag to borrowers. If the ratio is high, it could signal to lenders that you are a high-risk borrower, making them inclined to increase your annual percentage rate (APR).
- Future credit procurement or terms. Using a high credit limit (or even simply having one) could hurt your ability to obtain more credit. Potential lenders often see a higher credit limit as simply a higher potential for larger debt and therefore higher risk.
- Credit scores. As you may be able to infer, credit scores are constantly fluctuating based on several factors, due in part to the fact that the score affects so many factors itself. That said, you need to be vigilant about how you manage your credit."Consumers know all too well that going over their credit limit can mean a nasty fee, a higher interest rate and maybe even a lower credit score," says Jessica Dickler of CNNMoney.com.