The Relationship Between Credit Scores and Credit Limits

Though many people are unaware of the fact, there is a strong relationship between credit scores and credit limits. Understanding your credit score will help you understand what your credit limit is. This in turn will help you understand how your credit limit then impacts your credit score and vice versa.

Anyone who has ever had a credit card before has also had a credit card company decide on their credit limit. Oftentimes, this can seem like a random process and procedure. The number that your credit card company comes up with for your credit limit can seem quite arbitrary.

There is actually a process behind this decision though, as much as it sometimes might seem that there isn’t. The process of underwriting is used by these credit card companies to determine which consumers to approve and what rate to give them as well as what their credit limit should be.

credit limit

Underwriting differs from company to company and is generally kept a secret. The reason that credit card companies are so secretive about it is because underwriting plays a significant role in each company’s profitability.

Because of this secrecy, little is known, at least popularly by the public, on the specifics of underwriting or on credit limit decisions. This contributes to a good part of the mystery on how credit limits are decided upon.

However, we do know some of the process that goes into underwriting and the setting of credit limits on credit cards. The basics of this knowledge and information are discussed in greater detail below.

What a Credit Score Shows

Your credit score can show a credit card company many things. In particular, your credit score can help a credit card company determine your risk as a customer. It can show them if you are at risk of defaulting and it shows them a detailed history of your on-time payments. Basically, it can let them know if you are good (or, well, not very good) at managing your credit all things considered.

A credit card company can also user your credit score to calculate your expected default rate. They can do this at any time. This helps them determine whether increasing your credit limit could prove beneficial to them (as in providing more revenue) or if reducing your credit limit might be necessary (to prevent losses).

The Differences in Credit Limits Between Companies

As you might have noticed, especially if you have (or have had) credit card from several different major providers, each company seems to issue a different credit limit. The fact of the matter is that each company’s underwriting process is different and that they look at your credit score differently when making their individual decisions.

Part of the difference in their underwriting processes can be accounted for the different types of customers that they cater to. Each major company tends to target a specific type of consumer and they design their marketing strategies and campaigns around this fact. Some companies focus on younger consumers while others focus on older consumers. Some focus on providing deals to consumers with high credit scores while others attempt to take on consumers with lower credit scores. There are many differences. The main thing to understand is that every company’s individual methods are different.

The Feedback Loop

The relationship between credit scores and credit limits works on a feedback loop of sorts. Your credit score influences your credit limit but at the same time your credit limit influences your credit score. It can be a hard loop to break out of.

However, the relationships between the two are not always mutually exclusive. There are a variety of other factors that play an important role in them. One of these is credit utilization. Payment history, other lines of credit, and household income can all play important roles in the credit limit you receive from a credit card company.

The Bottom Line

The bottom line of this all is that it is up to credit card companies to have the final decision on what your credit limit is. Each process of underwriting is slightly different and so each company will provide you with a slightly differing limit. This is just the way it is.

However, by gaining a better understanding of your credit score and how it influences credit limits in general (and the other way around), you can increase your knowledge of how the game is played. You can give yourself an advantage when looking for new credit cards from different credit card providers. Best of all, you can manage your credit health much more successfully.

The bottom line is that underwriting frames the rules of the game when it comes to issuing credit and setting credit limits. But by better understanding how credit scores influences credit limits and vice versa, you can play the game to your advantage with a more empowered approach to managing your credit health.

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