Most credit cardholders are bereft of the knowledge of the provision of credit limit provided for by credit card Issuers which is well hidden or enshrined in the terms and conditions that most if not all credit cardholders overlook.
This article is to expose you to the meaning, importance, benefits of these credit limits to high and low-income earners.
What is Average Credit Limit by Income?
Average credit limit is the maximum amount of credit or finances a lender or financial institution or credit card issuer or creditor can give to a borrower or client or credit card holder or debtor within the life span of the credit card or credit card cycle.
It is the maximum amount one is allowed to borrow within a credit card cycle. Once you have reached your credit card limit, the power of your credit card will cease.
Why is Credit Limit Important?
The credit limit is quite pivotal or of immense importance to the creditor or lender because it gives the creditor or lender the guarantee or assurance that the debtor or borrower will pay his debts or dues without hassles or financial squabbles.
To the debtor or borrower, credit limit assists the debtor or borrower to know the borrowing power or limit.
How is Credit Limit Decided?
While each lender has its own way of finding out the credit limit for each of your cards, one of the top considerations lenders factor into their decision is your ability to repay the money that you borrow.
The several factors that determine how credit limit is decided are as follows:
1. Credit Report:
This gives information about or details about the number or types of one’s credit account, duration at which the credit account has been active or open, debts, amount of used and unused credit, whether bills were paid as of when due, and how many recent credit limit inquiries were made.
Read this: What is Revolving Credit? Overview And How It Works?
2. Credit History
This is a record of the borrower’s ability to repay past and existing or present or current debts.
3. Credit Score
This aids lenders or creditors to decide or determine if the debtor or borrower or applicant merits the creditor. This is also a three-digit figure that ranges from 300 to 900.
4. Credit Utilization Ratio
This is the expended credit compared to the credit limit in a credit card cycle. A 40% or 30% or below utilization of the credit limit is favorable while a higher is non-favorable.
5. Income
This is the reward for labor. The higher the earned income, the higher the credit limit, the lower the earned income, the lower the credit limit.
Can I Increase My Credit Limit?
There’s always the possibility of an increase, no matter what credit limit you start with, as long as you’re not using too much of it, making timely payments, and managing the rest of your credit effectively.
According to forbes, asking for a credit limit increase is acceptable if the cardholders’ goal is to lower their credit utilization while clearing the balance on their account or other accumulated debt.
If the purpose is to simply have more money to spend without a strong strategy to pay it all back, it’s not a good idea to apply for a limit increase. Instead of requesting more credit, the cardholder should endeavor to pay down their balance on the card.
You can increase your credit limit through the following ways:
1. Through an online request:
Most financial institutions or credit card Issuers have created an avenue for credit cardholders to request and increase their credit limit online.
All that needs to be done is to log into your account and click on the option for an online request for an increase in credit limit and submit after filling in the necessary information.
2. Call or Dial your card issuer
At the back of the credit card lies the number of the customer care service representative of the card issuer. Dial the number to know your eligibility for a higher credit limit.
The representative could inquire as to the reason for an increase in credit limit as well as whether there has been an increase in income recently.
3. Automatic Increases
Financial institutions or credit card issuers can solely grant an automatic increase of credit limit to credit cardholders who have been in possession of the credit card for a while and have been utilizing the same or credit card responsibly.
4. Request for a New Card
The credit card holders can personally and physically request a new card especially if the credit card holders have been good and prompt in making the payment with the lines of credit the credit card holders have and are in good shape.
Are There Benefits of Increasing Your Credit Limit?
Increasing your credit limit can help you repair your credit, make large purchases efficiently, or use credit to handle emergencies. A higher credit limit can even boost your credit score. Here are a few benefits of increasing your credit card limit:
1. Reduces the Credit Card Holder’s Credit Utilization:
The act of increasing the credit limit can reduce credit utilization, potentially/ thereby boosting the credit holder’s credit score. It has been the advice of credit experts that the credit utilization ratio should be kept at 40% or 30% or below.
2. Affordable and Easier to Obtain Additional Credit and Loans
A higher credit score gives the credit card holder a better opportunity in the future of getting approved for a credit, loan at a lower interest rate. Since the credit score is a determinant of whether the borrower will be offered the best available rate or a higher risk-adjusted rate.
3. Aids in Period of Emergency
Having a credit limit well above one’s normal spending amount affords one the resources to handle emergencies that one can’t pay for with cash.
For instance, a change of plans due to an emergency while on transit on-air requires one to pay for another flight ticket via a credit card once he lands for it is more convenient.
4. Aids to Earn More Rewards
A credit card holder with a high credit limit can promptly pay off the credit card balance and not putting all expenses on the credit card aids to increase the rewards to earn.
5. Permits One to make Large Purchases Efficiently
A cardholder with a high credit limit can conveniently make high purchases which aids to earn more rewards.
Disadvantages of Increasing Credit Limit
There is a popular saying, with great power comes great responsibility. A cardholder with a high credit limit has the tendency to abuse such power and suffer the consequences through the following ways:
- Reckless spending will defeat the purpose of an increase of credit limit which is the reduction of a credit utilization ratio.
- Higher credit expenditure with an eventuality or probable/possible consequence of inability to pay the entire amount on time. And the credit holder will be liable to pay at a higher interest in the next cycle for the carried-over balance.
- Credit card theft or fraud adversely affects cardholders with a high credit limit.
How Do Credit Card Issuers Determine Your Credit Limit?
Credit card Issuers determine the credit limit of credit card holders by evaluation of certain factors such as credit score, credit history, credit report, credit utilization, and income.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 of the United States of America provides that lenders should take into cognizance the ability of credit cardholders to pay.
This is a reason for which credit card issuers or lenders request credit card holders’ or borrowers’ income.
What Is The Average Credit Card Limit By Income?
This is determined by the employment status and income of the borrower. The Experian Data of 2019 reveals that Americans have an average credit of $22,751 available to them across all their credit cards.
Here’s a look at how generation fared in Experian’s report on average credit card limits:
- Silent generation (Ages 74+): $32,338
- Baby boomers (Ages 55-73): $39,919
- Generation X (Ages 39-54): $33,357
- Millennials (Ages 23-38): $20,647
- Generation Z (Ages 18-22): $8,062
Although the statistics strongly suggest that your age — and consequently the duration of your credit history — has a significant impact on your credit limitations, it is possible to deduce something else.
Because the oldest generation is primarily out of the working, the decline in average credit card limits from the baby boomer generation to the silent generation could be due to the impact of income on spending limitations.
Also, you can check this: Can You Pay a Credit Card With a Credit Card? | 2022
High Credit Limit vs Low Credit Limit
Credit Limit be it high or low is juxtaposed vis a vis credit utilization. Therefore having a higher credit limit gives you more ability to spend, which can translate into greater rewards.
If you’re financially stable and use credit cards for the convenience and the perks, having a higher credit limit can be particularly attractive. While having a low credit Limit helps to keep spending on track and avoid reckless spending.
Conclusion
Utilizing the benefits of credit limits provided by credit card issuers or lenders for credit card holders or borrowers aids high-income earners to effectively handle emergencies and low-income earners to avoid reckless spending, all to handle day-to-day obligations.
Frequently Asked Questions on Credit Limit
Income is an important factor that determines credit limits. Low-income earners possess low credit card limits, high-income earners possess high credit card limits because of their ability to pay.
One cannot accurately predict a credit limit but one can look at averages. The higher one earns or income, the higher one’s credit limit, and the lower one earns or income, the lower one’s credit limit.
The 40% or 30% rule is a good guideline that stipulates that not more than 40% of the credit limit should be utilized so as to maintain a strong credit ratio.
For instance, 30% of a $2,000 credit limit gives a balance of $600, and 40% of a $2,000 credit limit gives a balance of $800.
Therefore it is not advisable or of best interest to have a balance of more than $800.
Lenders calculate the credit limit of borrowers using a confidential and complex procedure known as underwriting.
This procedure varies from one lender to another lender. However, this procedure takes into cognizance credit reports, credit history, credit score, income, and credit utilization ratio.
References
- investopedia.com – Credit Limit
- blog.bankbaaar.com – The Pros And Cons Of Increasing The Credit Limit On Your Credit Card
- experian.com – How Does My Income Affect My Credit Limit?
- nerdwallet.com – How Do I Get a Higher Limit on My Credit Card?
- cnbc.com – What is an average credit card limit?
- creditkarma.com – What is a credit limit?
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