The ratio of credit being used is a very important factor in determining your credit rating or your credit worthiness. If the credit that is available is almost completely used it creates an impression that is used to determine your credit rating. For example if you have a $2000.00 balance on a card with a $4000.00 limit you are using half of your potential and this is around the maximum you want in order to maintain an excellent credit rating. A balance of $2,000.00 on a credit card with a $7,000.00 credit limit is a much healthier proportion.
In this way, the lower the debt credit ratio is the better the credit rating figure will be. Therefore by lowering the ratio and improving your credit rating can be as simple as requesting a higher credit limit.
A credit limit is the maximum amount of credit that a potential lender will extend to a debtor for a particular line of credit; for example it is the most that a credit card company will allow a card holder to take out at once on a card and is usually stated in the terms and conditions of the credit card after the application has been approved. In the case of instant approval credit cards the credit limit may or may not be decided with the initial response as the instant response credit card is an indication of credit worthiness but how much credit is available may require human input. Credit limits are based on a variety of factors ranging from an individual’s ability to make interest payments, an organization’s cashflow and/or ability to repay the principal, to the credit standards employed by the lender. A credit limit is also based on the borrower’s recoverable assets in the event of default.
Credit limits are most often seen by consumers in the form of revolving lines of credit known as credit cards. They are also used in the extension of open account credit terms from business to business. Other examples include home equity lines of credit, residential mortgages/owner-occupier home loans with redraw facilities, a commercial line of credit or a Bank guarantee. The limit imposed in most cases is fixed for the life of the product, except in the case of credit cards that may be raised upon each application received by the card holder or offer by the card issuer.
