Approved Credit Limit Definition :
The Approved Credit Limit is the maximum amount of credit a lender, financial institution, or supplier grants to a borrower or business based on their creditworthiness, repayment history, and financial stability. This limit defines the highest outstanding balance a customer can maintain on a revolving credit account, trade credit agreement, or loan facility without exceeding the lender’s risk tolerance.
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How is the Approved Credit Limit Determined?
Lenders consider several key factors when determining your approved limit:
Credit Score
A higher credit score indicates responsible credit behavior, leading lenders to trust you with a higher credit limit.
Income Level
Your income reflects your capacity to repay borrowed amounts. Higher income often results in a higher approved limit.
Debt-to-Income Ratio
This ratio compares your monthly debt payments to your monthly income. A lower ratio suggests better financial health, influencing lenders to offer a higher credit limit.
Credit History
A long history of timely payments and low credit utilization signals reliability, encouraging lenders to increase your limit.
Existing Debt
Lenders assess your current debt levels to ensure you can manage additional credit responsibly.
Difference Between Approved Credit Limit & Available Credit
While the approved credit limit is the total amount you’re authorized to borrow, available credit refers to the unused portion of that limit. For example, with an approved limit of $5,000 and a current balance of $1,500, your available credit is $3,500. It’s crucial to monitor your available credit to avoid exceeding your limit, which can lead to penalties and negatively impact your credit score.
Impact of Approved Credit Limit on Your Financial Health
Your approved limit significantly affects various aspects of your financial well-being:
Credit Utilization Ratio
This ratio measures the amount of credit you’re using relative to your total credit limit. Keeping this ratio below 30% is advisable for maintaining a healthy credit score. For instance, if your total approved limit across all cards is $10,000, aim to keep your total balances below $3,000.
Credit Score
A higher approved credit limit can lower your credit utilization ratio, positively influencing your score. Conversely, maxing out your credit limits can harm your score.
Loan Eligibility
Lenders consider your credit utilization and existing credit limits when evaluating loan applications. Responsible management of a higher approved limit can enhance your eligibility for future loans or mortgages.
How to Increase Your Approved Credit Limit
If you aim to increase your approved limit, consider the following strategies:
Timely Payments
Consistently paying your bills on time demonstrates reliability, encouraging lenders to raise your credit limit.
Increase Income
Reporting a higher income can lead lenders to offer a higher credit limit, reflecting your enhanced repayment capacity.
Reduce Debt
Lowering your existing debt improves your debt-to-income ratio, making you a more attractive candidate for a credit limit increase.
Request a Credit Limit Increase
Contact your credit card issuer to request an increase. Be prepared for a possible hard inquiry on your credit report, which could temporarily affect your credit score.
Risks of a High Approved Credit Limit
While a higher limit offers increased purchasing power, it also carries potential risks:
Overspending
The temptation to utilize the additional credit can lead to accumulating debt beyond your repayment capacity.
Increased Interest Charges
Higher balances can result in substantial interest charges if not paid off promptly, escalating your financial burden.
Credit Score Impact
Mismanagement of a higher credit limit, such as high utilization or missed payments, can negatively affect your credit score
To know more about how you can manage your credit limit better, you can visit FinFloh’s Credit decision product. You can also Talk to our experts to get a consulting recommendation list for credit limit management.
