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.