Credit limit dilemmas

Credit limit can be quite a dilemma at times. Both, having too much credit and not having enough credit limits can be equally troublesome. Credit limit is the credit amount in which a financial institution such as a bank or private creditor extends to a customer. A credit limit on a credit card is the maximum amount the card company is willing to allow the card holder to spend on that specific card or cards linked to a single account.

How is credit limit determined?

Credit limits vary from individual to individual. It is usually determined by the information the individual fills in the form during the application process. The applicant’s income, outstanding debt, total liabilities etc, all go into determining how much money the company is willing to risk lending to the particular customer.

Card companies and lenders will carefully analyse and fix an upper limit for any amount they will consider lending to anyone. This upper limit will then be referred to as the “credit limit” for that particular individual. This credit limit will vary from lender to lender and card company.

How does a credit limit affect a borrower?

When someone applies for a credit card or money loans for the first time there will be no credit ratings available with the credit bureaus. In such a scenario the lender or credit card company will not be able to gauge the applicants creditworthiness. The applicant may have an impressive income or bank balance, but his/her dedication to repay the debt in a timely and disciplined manner cannot be ascertained. Therefore, the lender or card company will shy away from taking a risk and will decide to start the individual off with a very low credit limit. This can be quite a credit limit dilemma.

As the individual repays small outstanding debts and card payments the card company or lender will consider increasing the credit limit.

On the other hand, if a person has a bad credit rating, this can give rise to another kind of credit limit dilemma. In such a case no lender or card company will be willing to extend the individual any credit at all, or if they do consider lending him or her some cash, it will be at a very high rate of interest. In such a case the individual will be best advised to repair the credit score in question by resorting to certain techniques used to repair credit histories – such as debt consolidation – before applying for a fresh line of credit.

Large credit limits can be a hindrance too  

Believe it or not, but access to too much credit can be quite a hindrance too when it comes to applying for a fresh line of credit. Lenders will see that the applicant has a number of sources to pick up credit from and this could lead to the individual taking too much credit that it will eventually lead to him or her not being able to repay the debt. This will prevent the new lender from offering too much credit to such an applicant.

In such a case it is best to do away with the extra credit cards and keep a low credit profile by not applying to too many places for advances. Too many applications in various places will scare off any potential lender.

 

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