How to Determine the Appropriate Credit Limit

What’s my appropriate credit limit? This is the question that’s in the minds of everyone who has a credit card. Before you understand the appropriate credit limit, it’s important to know what a credit limit is and how is it determined. Credit limit refers to the maximum amount of money that a credit card company allows the holder to borrow on his card. There are two factors that primarily determine a person’s credit limit, viz. credit score and gross annual income. The higher the credit score and the gross annual income, higher is the credit limit. While some companies approve a higher credit limit almost immediately, there are some that follow the wait and watch approach. They generally wait for a few months, until approving the credit limit. Companies that allow a higher credit limit, often compensate for this by charging you a higher interest rate. The above mentioned factors remain the basic yardstick to determine credit scores. But the manner in which these are used are quite complicated and determined with the help of a dozen charts with a lot of other metrics. Factors like how well you pay, how often you use the card, how prompt are you in clearing off your debt etc. Some companies automatically increase the credit limit once or twice a year, but this can be revised depending on the credit score. If you’ve been a good spender (and a good re-payer), the company revises your spending limit more than their periodic increase. Even when the company promises you an increase spending limit, remember that this could be risky. After all the company gives you this because you pay promptly, hence you wouldn’t want to bite more than you can chew. But if you’re in need of a higher credit limit, and are sure about repayment you can call the company and request one. Banks often rely on your, self reported income to determine your credit limit. Hence if there’s an increase in income, make sure you inform the credit card company. When you call the company, they’ll ask you if you’re income have increased, thus allowing for a higher credit score. An appropriate credit score is one that is about 25% of your annual income. This limit is ideal and would give you the confidence that the money can be paid off without accruing penalties. Students looking to avail a credit card can settle for a credit limit that’s low. As earlier said, the lower the credit score, lower is the interest rate and penalty. Student’s are often carried away by the higher spending limit and often end up paying debts up to their 30’s, for debts that were incurred when they were in college.