When a applying for credit, whether personal or business, the size of the credit approved seems like a mystery in many
cases. With personal credit cards, the banks use a range of variables and algorithms to come up with this magical number called a credit limit. In recent times we have actually seen high credit limits cut in half for lack of use. Although we cannot tell exactly what algorithms and variables are used to calculate this credit limit, we do know some factors that affect the decision, and some of these variables may surprise you.
1. Your Credit Score – This is pretty basic. The 3 major credit bureaus issue credit scores based on past payment history as well as credit ratios (such as dent to income ratio and credit utilization ratio). The banks now use this score(Your FICO score) that they pull from any one or all three of the credit bureaus to give them an indication of how credit worthy you are.
2. Income – This is another obvious one. The more money you make, the banks take it for granted(to a certain degree) that you are more credit worthy.
3. Where you live – This is a surprising one, but it is a factor. Banks use statistics on a State and sometimes a City level, to regulate the size of the credit limits issued to individuals. I have even come across some credit cards that simply are not offered in some states due to high delinquency and fraud in those states. Some of these location based statistics are , Average Credit Score, Foreclosure Rates, Credit Card Delinquency Rates, Unemployment Rates and Bankruptcy rates. I know that it may seem unfair in some ways, but Banks simply have to reduce the risk of default, and these indicators give them some insight in what to expect.
4. How you use your credit card – Banks periodically check the usage of there current credit card holders and either offer to increase or instantly decrease a credit limit. During the credit crunch we saw many cards being decreased for various reasons, some of which seem to be a mystery.
Look out for the Business Credit Version of this post. It will really give you some do’s and don’t when structuring and building business credit.
