What You Need To Know About Credit Limit

Lenders use your credit limit as a gauge on two different aspects of your credit. On the one hand it helps them determine how much credit they are willing to extend and on the other it helps them determine how much they are willing to lose if they are stuck in unpaid balances. How do they determine how much they are willing to lose? This works on a percentage of your total balance. For example if your credit limit is $300 and your balance is lengthened so that it is now $330 then your lender may be willing to lose as little as 10% of $300 as long as it is still less than 15% of your balance. The credit utilization rate is the ratio of your credit limit to your credit balance. This is how lenders determine if you can afford the credit. This means that out of every $100 of credit you could be carrying about $50 of debt. The higher your credit utilization ratio then the higher your credit score will be. This is generally good as it shows your ability to handle credit and that you are not over extended. However, if your credit utilization rate is over 25% then you most likely will see a credit limit increase. Lenders like working with consumers who use less than 50% of their available credit. This shows them you are reducing your debt and can be expected to improve your credit score. It may not seem like a big deal to some that they only need to increase their credit limit by $50. However, increasing your credit limit can improve your credit score by more than $100. This is because if your credit utilization rate is high then higher credit limits will not increase the amount of credit potentially available to you. But how do you get an increase of more than $100? You must have great credit to accomplish this. Many times it can take several months of on time payments and an excellent payment history to get credit increased by a company but it can be done. Always ask the lender what factors are involved to increase your credit limit because many times if you ask you may not receive the credit limit increase. It seems like a waste of time to some people but it can be beneficial to you. You credit score is closely tied to your credit limit and it is common to see a credit limit increase by more than $100. This can really help with larger ticket items such as automobiles and home improvements. It can also help you to lower your monthly payment or help to make those payments less than amortized. It all just depends on how the increase happened. It is similar to a gain that you may make on a trading account but in a different way. Credit seems to jump around unlike a stock or investment that can only increase or decrease by the underlying trend of the market.