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    Home»Business»How Credit Limit Affects Credit Score in the Long Run?
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    How Credit Limit Affects Credit Score in the Long Run?

    DraykeBy DraykeOctober 15, 2022No Comments3 Mins Read

    Your credit limit is the maximum amount of credit that a bank extends to you. When you open a new line of credit with your bank, for example, you can request either a high- or low-limit card (or sometimes something in between). However, the difference between having a high or low limit isn’t just about how much money you have access to in theory—it also affects your credit score.

    What is a Credit Limit?

    A credit limit on a credit card is the maximum amount of credit a bank extends to you. It’s different from your credit line, which is how much of your total available limit you’re using at one time. For example, if you have a $10,000 limit and are using $3,000 worth of it now, then your balance (or credit line utilization) would be 30%.

    The lender decides what the maximum amount they’ll extend to each borrower will be based on many factors including their income and assets.

    Credit Card Limit vs Available Credit

    Let’s start with the basics: Credit card limit is the maximum amount of credit a bank extends to you, while available credit is the amount you have used. Your credit utilization ratio is the percentage of your available credit that you use. It’s important to keep this figure low because it has an impact on your score.

    Based on research from FICO (a company that provides analytics for lenders) about how people with different scores tend to behave when their averages fall into certain ranges:

    • Excellent credit = 0% – 10% utilization
    • Very good credit = 10% – 30% utilization
    • Good credit = 30%-50% utilization
    • Average/Fairly Limited Credit = 50%-80% utilization; poor/limited: >80%.

    Types of Credit Limits

    Credit limits are the maximum amount of credit that a bank extends to you. They are usually calculated based on your income and other factors associated with repayment ability, such as employment history, assets and existing debt. Credit limits can change over time as banks take into account factors like your income and financial situation when deciding what type of credit limit to give you.

    Credit limits can be a fixed amount (e.g., $20,000) or represent a percentage (e.g., 50%) of your total available credit lines at that particular bank or lender. Your total available credit line is the sum of all open accounts with your lender that have been extended by them to you (including auto loans).

    Credit Limit, Debt Utilization and Your Score

    Credit limit is the maximum amount of credit a bank extends to you based on your income, assets and financial history. This includes credit card limits, mortgage, loan and other types of loans.

    There are many different types of credit limits: Mortgage loan; auto loan; student loan; personal loan; business line-of-credit; home equity line-of-credit (HELOC); secured personal loan (secured by collateral) unsecured personal loans etcetera

    “Those who maintain low balances and have a strong record of on-time payments will have greater spending power. Those who carry larger balances and make late payments will see their spending power shrink,” explain Lantern by SoFi advisors.

    Experts say that the credit limit plays a critical role in determining your credit score. However, it is not something that will affect your score significantly if you use it sparingly and responsibly.

    Drayke
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