This is one of the factors that credit card issuers take into consideration when approving your application or the amount of credit you are likely to be granted. Your income helps the issuers determine how much credit you can comfortably commit to so that you meet your obligations. Although credit limits are not calculated on this basis only, it is given considerable importance. That brings us to the question of how much your credit limit should be about your income. Here are some guidelines.
The 30% Rule
One of the rules commonly followed by issuers is the rule that the credit limit should allow for an open-end credit card usage of approximately 30 percent of the monthly income. Credit card balance to total credit limit is the proportion of the amount that you use on your revolving credit cards each month. Revolving utilization is another important factor and according to credit experts, one should ensure that this stands below 30% for a good credit score. Therefore, credit issuers can set 30 percent of your monthly income as the standard measure of credit limit.
For instance, if the monthly income is $5,000, the credit limit of about $1,500 can involve 30% utilization ($1,500 x 0. 30 = $450). Therefore, if you operate with a $1,500 limit and have a $450 balance every month, your credit utilization ratio will be 30%. Of course, this is just a guideline – actual limits may be higher or lower. However, the 30% rule gives a rough idea of the amount.
Minimum Credit Limits
Likewise, most credit card companies have their minimum credit limits that they set irrespective of income. For a standard credit card, this minimum is typically between $ 500 and $ 1000. Thus, even an individual with very little income would expect to receive an initial limit of $500 or more. Lenders make these minimums to ensure that even the so-called ‘low-income’ earners can at least have some functionalities of the card. The hope is that the limit can be adjusted in the future, as needed when the cell phone is no longer required for outgoing calls.
Maximum Initial Limits
At the other end of the spectrum, most issuers also limit the maximum amount of the initial credit limit that they will offer. This is usually within $5,000-$10,000 for a conventional card for those who have a good credit score and income. Therefore, even if you would be able to afford a much higher limit using the 30% rule on your income, the first limit’s upper bound may be capped at the initial limit. However, a higher credit limit can be achieved several months after one has proved to make timely payments on the credit limit granted.
Other Factors Beyond Income
While income plays a key role, credit limits are based on several other factors as well including: While income plays a key role, credit limits are based on several other factors as well including:
- Credit score – People with higher credit scores are likely to be granted high credit limits
- Credit limit – Those with good payment records may often be given higher credit limits.
- Debt to income ratio – The total amount of payments for debts about income is taken into account
- Credit history data length – Those with long credit data length tend to get higher approvals
- Kind of credit card – As mentioned earlier, premium travel credit cards have higher credit limits.
So income is part of the puzzle card issuers consider when determining your limit, still a relevant factor. This is why two people earning the same may get different credit limits on their credit cards.
Asking for Limit Increases
Instead of applying for a new credit card, some people prefer to approach their current card issuer and request an increase in credit limit. This helps you to spend more than your limit without having to undergo another credit check. Most issuers permit you to request higher limits from time to time, probably after 6-12 months. To improve your chances of being granted a higher limit, the following should be observed: pay your bills on time, maintain low credit utilization, and only request an increase after six months.
In the application process, it is necessary to explain why it is necessary to increase the limit and indicate whether there has been an increase in income since the last application. Be reasonable given the limitation of the 30% rule. The employees with the best payment records are usually granted healthy revolve usage through increases that are considerate.
Managing Your Credit Limit
Having an appropriate credit limit aids in the fact that you should not overutilize your credit, which in turn is good for your credit score. Ideally, balances should be 30 percent or less of the total available revolving credit for the month. It is also wise to avoid charging items that you cannot afford to fully pay on the next statement to reduce the interest rate.
You should also pay attention to your accounts and check them frequently for any suspicious activity. It is also important to note that the higher the limits, the more you are exposed in case your card is compromised.
This is due to the fluctuations in the amount of income that you earn hence required to review the credit limits from time to time. While previously a certain limit might have been appropriate given a lower salary, it may now be insufficient. Many issuers are prepared to periodically raise the limit by the growth of income to retain activity and customer satisfaction.
The trick is to find the ‘goldilocks’ level – this is not as high as to be unaffordable about revenue, but, at the same time, not too low to limit usage. Assess your expenses and the 30% rule to settle on a credit limit that provides enough margin to avoid excessive spending pressures. Free up your utilization and make changes to the limits to ensure that your accounts are within that favorable credit range.
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