The Relationship Between Your Credit Score and Credit Limit

The Relationship Between Your Credit Score and Credit Limit

One of the keys to managing your credit is understanding the role your credit score plays in determining your credit limit and vice versa.

Behind Credit Limits

Credit card companies decide your credit limit through underwriting, a process of considerable testing and analysis used to determine who to approve, at what rate and at what credit limit. Underwriting details are guarded company secrets because they impact how a company makes money. Due to this, it's hard for consumers to get more than a limited understanding of how credit limits are determined.

To shed some light on the relationship between credit scores and credit limits, Credit Karma sampled approximately 15 million Credit Karma members who visited the site in 2014, and compared their credit limits with their credit scores.

Findings

The graph above suggests that there is a significant correlation between consumers having a higher credit score and having higher credit limits. This makes sense when we consider the fact that your credit score is meant to be an indicator of your default or delinquency risk and overall credit management. Using credit score and other credit report information, a credit card company can estimate whether an increase in your credit limit could provide an additional revenue opportunity for them or whether a credit line reduction is necessary to reduce their risk for losses.

How does this work in practice?

Say, for example, consumers with a "fair" credit score may have an expected default rate of 10 percent*, meaning the expected loss on a $1,000 credit limit would be $100. On the other hand, consumers with an "excellent" credit score may have an expected default rate of one percent*, meaning the expected loss on a $1,000 credit limit would be $10. In this scenario, assuming the expected revenue from each of the consumers is similar, an "excellent" credit score cardholder is more likely to be approved for a higher credit limit, thanks to their better credit profile.

The influence credit scores have on credit limits works in a feedback loop, but other credit report factors can come into play in determining each. Other factors such as payment history, credit utilization, types of credit and changes in spending patterns can also contribute to an increase or decrease in credit scores or credit limits.

*Example rates are for illustration purposes only.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.

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5 Contributions
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Helpful to 4 out of 5 people

I've got a credit card limit of $1500 and a score 0f 745. I guess I'm an outlier...

1 Contribution
0 People Helped

I do not understand this cycle. The average person who makes a decent living using credit to live. Pays on time, and at a certain expense (interest) but yet the goverment(Fed,State,& Local) are all having budget defecits, and they don't understand how money is tight in the home. Then they take our tax dollars and help out the banks? Then the banks take our tax dollars and offer no help to the average person? Does this seem backwards to anyone else but me? If Congress had taken the TARP funds, and distributed them to the taxpayer(any income bracket) wouldn't that money had more stimulus effect than the way they thought it would and didn't? Some people would have paid off debt, others saved, others invested, but most, being American, would have gone out and spent it, on new homes, new cars, luxuries, necessities. Think of all those businesses that would have scene and increase in sales volume (goods, services, deposits) and how that would have created jobs. Instead they gave it to the banks to shaft us instead. Makes no sense.

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Reply by
theheat71

41 Contributions
106 People Helped
Helpful to 2 out of 2 people

I Agree. The banks are still as greedy as they were before they begged for the 700 Billion....yes I said 700 Billion dollars form a trillion dollar deficit.

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