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Lenders weigh a variety of factors when determining what credit limit to offer a new borrower. Your credit score can play an important role, but it's far from the only thing that matters. When you open an account, creditors want reassurance that you'll be able to make good on your payments, which is where your earnings come in. Having a steady stream of reliable income can help show lenders that you're an appealing borrower.
Even after you're approved, creditors may continue to inquire about your earnings to make sure your borrowing power is still appropriate. Your credit limit can rise and fall based on many factors, including broad economic conditions—and your income is a big part of what shapes it. Read on for a closer look at how your income can affect your credit limit.
Do Lenders Look at Income to Determine Credit?
Most lenders do look at an applicant's income when determining their credit limit. Creditors want to feel confident that you have the ability to repay your debt obligations without any issues, and knowing your income helps with that.
Your income is not among the information that's included on your credit report, and the way you provide it to a lender can vary depending on the type of credit. If you're applying for a credit card, for example, the income amount you put on your signed application is usually what the creditor will use to help determine your credit limit.
Lenders sometimes go a step further and require that you verify your stated income. This is common with auto loans and mortgages. You may be asked for recent pay stubs or tax returns to confirm your employment and earnings. These details help lenders determine your debt-to-income ratio (DTI), which measures how your debt obligations relate to your earnings. A borrower with a high income is less impressive to a lender if they are deep in debt.
To figure out your DTI, simply divide your total monthly debt by your gross monthly income—the lower your percentage, the better. Many lenders prefer a DTI below 36%. A lower DTI paired with solid income could unlock a higher credit limit.
What Else Determines Your Credit Limit?
In addition to looking at your income and DTI when deciding a credit limit, lenders will also zero in on your credit history and credit score. Both provide a snapshot of your financial health, but in different ways.
Your credit report summarizes your open accounts and debt obligations. It includes information such as your credit account balances, payment history and credit utilization ratio, which is the percentage of your credit limits you're currently using.
Credit utilization works like this: Say you have a $500 balance on a credit card with a $1,000 credit limit. Because $500 is 50% of $1,000, your credit utilization ratio for that account is 50%. Your credit utilization is considered on an overall and a per-card basis, and it's recommended to keep this ratio below 30% across the board. As far as your credit scores are concerned, the lower your credit utilization, the better.
The information on your credit report is also what determines your credit scores, which are represented as a number ranging from 300 to 850 in the most commonly used consumer score models. Most lenders rely on a version of your FICO® Score☉ when making lending decisions, but there are many types of credit scores to be aware of. It's important to remember that while your income can affect your credit limit, it has no bearing on your credit scores, so increasing your income may net you a higher limit but result in no change to your credit scores. When it comes to determining your credit limit, lenders consider your scores alongside your credit history, current debt load and income.
How Does Your Credit Limit Impact Credit Score?
Your credit utilization is an important factor in your scores, and how big or small your credit limits are can greatly affect it. Even if you're a high earner with a great job, your credit score will suffer if you've maxed out all your open accounts. In some instances, it could prevent you from getting approved for a new account altogether.
Increasing your credit limit can bring down your credit utilization ratio and help lift your credit score. The opposite is also true. If your available credit goes down while your spending habits stay the same, it can drag down your score. Closing out old credit cards, missing payments or reporting a reduction in your income all could result in lower credit limits.
How to Increase Your Credit Limit
One benefit of increasing your credit limit is that it can positively impact your credit score pretty quickly, assuming you don't drive up your balances. One way to do it is to simply call up your creditor and ask. (Yes, it might be that easy.) It isn't unreasonable to expect a 10% to 20% bump.
Another way to increase your credit limit is to open an entirely new credit account—and use it responsibly. If you're unable to pay off the balance in full each month, aiming to keep its utilization rate under 30% can go a long way in improving your credit score.
The Bottom Line
Your income is one of the many things lenders consider when determining your credit limit. Along with your credit history and credit score, it helps paint a picture of who you are as a borrower. Before applying for credit, take a look at your credit reports. You can do this by getting a free copy of your credit reports from all three credit bureaus—Experian, TransUnion and Equifax—from AnnualCreditReport.com. You can also get your free credit report and score directly through Experian to help bring it all into focus.