A variety of methods are used for determining credit limits, including predetermined credit limits and limits based on the cardholder's credit score, according to Janna Herron for Bankrate. Some companies also customize the limit based on a number of different factors.Continue Reading
Some credit card companies rely on a simple system of using predetermined credit limits, explains Herron. This means each of their credit cards already has the limit set. For example, the company's most basic card might have a limit of $500, with the next level card having a limit of $2,500 and the highest level card having a limit of $5,000. This has little to do with the applicant's credit rating or other factors, aside from the fact some people only qualify for the lower level cards.
Other credit card companies have a range of possible credit limits and base the final decision on the person's credit rating, notes Herron. This is similar to how financial institutions decide on the interest rate for a loan or credit card. Lower credit ratings receive lower credit limits because the credit card company sees these people as a bigger risk for not making payments on time. Higher credit scores get the higher credit limits. Some credit card companies agree to raise the limit over time if the payments are made on time.Learn more about Credit & Lending