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Credit card companies determine your credit limit through a complex process called underwriting, which works according to mathematical formulas, considerable testing, 

and analysis. Details of the procedure are protected since it's the way that the company makes its money. The heart of the matter is that this system of computation helps the company decide who to approve, at what rate and which limit. The higher the credit limit, the more that the company indicates that it trusts a borrower to repay their debt. Here are the basic principles that issuers use to determine your credit amount.


What is a Credit Limit?
A credit card credit limit is the amount of credit that a card issuer extends to its cardmembers. This credit limit, also called a credit line, is established once an application is approved based on the customer's credit quality and can increase over time with responsible card use. Customers can also request credit line increases over time to better meet their needs.


Cards With Preset Credit Limits
Most credit cards are issued with a preset credit limit. This means that once the issuer determines your credit quality they will assign a set dollar amount of outstanding balances you can have on your account in terms of new purchases and/or transferred balances. This preset limit. can increase over time or upon customer request if your credit scores warrant and the credit card issuer is willing to extend additional credit.

Cards with No-Preset Credit Limits
Some premium credit cards and charge cards come with credit limits that are not preset and are dynamic, meaning they can grow or contract based on your actual spending needs and behavior. However, if a large purchase is anticipated the dynamic credit line can usually accommodate spending that is out of pattern since there is flexibility is built in to these types of credit limits.

Credit History
Most companies check your credit reports and gross annual income level to determine your credit limit. Factors that issuers like to consider include your repayment history, the length of your credit history and the number of credit accounts on your report. These include mortgages, student loans, auto loans, personal loans and the like. Issuers also check the number of inquiries initiated on your credit report, as well as the number of derogatory marks, such as bankruptcies, collections, civil judgments or tax liens. The company funds your limit accordingly.

Other Variables
The underwriting process varies from company to company. Some issuers also check applicants' credit reports to discover the limits that exist on their other credit cards. Other agencies compare different types of scores, such as the applicant's credit score and bankruptcy score, to determine how much to fund the borrower. Issuers may also consider the person's work history or debt-to-income (DTI) ratio in order to decide how much of a risk that the applicant is to them. The more credible the person's work history and the lower his or her debt, the more likely that the person is to receive increased funds.

How Cardholders Can Apply for Credit Limit Increases
Applicants are more likely to have their credit raised if they've established a record of responsible usage and repayment of any balances in full on or before the billing due date. Companies tend to re-evaluate every six months and may automatically increase applicants' credit amounts if conditions warrant. Some issuers tell cardholders that they qualify and ask whether they want to apply for increased lines of credit. Cardholders can also request an increase by showing that they have been responsible users. On the flip side, issuers tend to decrease the credit limit if cardholders fall behind in their payments, or if they exceed their credit card limits. You can check your credit limit by calling your card issuer's toll free number listed on the back of your card or by logging into your account online.

The Bottom Line
Credit card companies determine an applicant's credit limit through a process called underwriting, which varies from company to company but, generally, includes computing factors, such as the applicant's credit score, history of credit card performance and income level. Cardholders can raise their credit limit by paying on time and keeping within their credit limit. Experian PLC (EXPN.L) recommends that borrowers increase their credit level, but that they use only a small amount in order to polish their credit scores.

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Published on: 1/20/22, 1:10 AM

Getting a credit card—and using it wisely—can be one of the best ways to build a solid credit history, especially at a young age. But that's not only true if you are just starting out, but also if you've had some financial difficulties in the past and need to rebuild your credit.


In today’s world, having good credit matters more than ever. A strong credit score can mean better rates when you want to take out a car loan or home mortgage. It can help in renting an apartment because the landlord may check it. And many employers look at credit scores when deciding whether to hire job candidates. Insurers may use them, too, in setting your premiums.

Bear in mind that debit cards, while convenient, are of no help in building your credit history. That's because they don't involve credit (you're just spending your own money), and banks typically don't report that activity to the major credit bureaus. Here are three simple ways to use a credit card to build credit.


Become an Authorized User 
The most straightforward way to build your credit is by taking out a credit card in your own name and paying it down each month. But acquiring a card with reasonable interest rates can be tricky when you have no previous credit history. Some companies have special cards for college students, but these also have requirements many young people may have trouble meeting, such as demonstrating that they have a reliable source of income.
Additionally, the Credit Card Accountability, Responsibility and Disclosure Act of 2009—a.k.a. the CARD Act—made it more difficult for younger Americans to get their own plastic.1

 An applicant younger than 21 years of age has to show proof that the financial means to handle their debt or get a parent (or spouse) to co-sign before becoming eligible for a card.


There is one easier way around this conundrum—ask to become an authorized user on your parent’s card.2 While that is a common first step into the world of credit, there are some potential hazards to consider. Your credit score will get a boost if mom or dad pays the bill consistently. But if they don’t, your FICO score—a number that's derived from your credit history—will get bruised, just like theirs.3

Keep in mind that the primary account holder is responsible for the entire balance, regardless of who incurred the charges. So if you ask a parent to become an authorized user on their card, make sure you have a clear, mutual understanding of how much you can spend each month.

Start with a Secured Credit Card
A secured credit card is "secured" by the money you deposit into a special bank account. Typically, the credit limit on your card is based on the amount of that deposit. With some cards, the required deposit may be as low as $200 or $300.

Secured cards limit the lender's risks and also help consumers who might be tempted to go wild with a regular credit card stay within their means.

If your bank reports your payments to one or more of the three major credit bureaus, and your credit record is otherwise unblemished, you may have enough of a history to apply for a regular credit card after six months or so. 

What's more, once you've demonstrated that you can be counted on to make your monthly payments on time, your secured card lender might be willing to "graduate" you to one of their unsecured cards if you ask. You may want to look for that provision if you're shopping for a secured card. Also, compare the annual fees and other charges on any cards you're considering.

Even with these kinds of cards, the CARD Act still applies. So if you’re between the ages of 18 and 21, you’ll probably need to demonstrate that you have a source of income and document your expenses.

Apply for a Store Card
If getting a standard credit card proves difficult, another option is applying for a store credit card, which many retailers offer for use in their own stores. These cards are generally easier to obtain for people with little or no credit history. They tend to have higher-than-average interest rates, but that won’t matter much if you carry a low balance or pay it in full with each billing cycle.

Other Important Considerations
Even if you find it relatively easy to get a credit card, don't get too many. Having more cards than you need won't help your credit score and may actually hurt it, according to Fair Isaac Corp., which computes FICO scores.

Also, whichever type of card (or cards) you sign up for, be sure to keep an eye on your credit utilization ratio. That's the percentage of your available credit that you're currently using. Generally speaking, a credit utilization ratio of 30% or less is considered ideal. So, for example, if you have a total credit limit of $10,000 on your cards, try not to owe more than $3,000 on them at any given time.

What's an authorized user?
This is someone with with permission to use another person's card. They are added to the account by the primary cardholder. The authorized user's credit score will get a boost when the primary holder pays the bill consistently. But if they don’t, the authorized user's FICO score will get dinged. If you become an authorized user, be sure to have a clear, mutual understanding of how much you can spend each month.

What Is a secured card and how does it work?
Secured credit cards resemble regular credit cards with one key difference: They require a “security” deposit, the size of which determines your credit limit with the card, at least initially. The advantage to this card type, compared with using a debit card tied to a checking account or a prepaid debit card, is that account activity is reported to all three major credit bureaus (because a secured credit card is a true credit card with a real credit limit). That reporting allows you to begin building a credit history; assuming it is positive, in time, it should allow you to get a regular credit card and other credit products, such as loans.

What's your credit utilization ratio?
This number is very important to maintaining good credit. It's the percentage of your available credit that you're currently using. Generally speaking, a credit utilization ratio of 30% or less is considered ideal. So, for example, if you have a total credit limit of $10,000 on your cards, try not to owe more than $3,000 on them at any given time.

Bottom Line
Without credit history, getting a card will be difficult. A credit card is one of the easiest ways to build (or rebuild) your credit history. If you don't qualify for a regular credit card yet, there are other options, such as secured cards, student cards and store cards. Once you get a credit card, be sure to pay on time and try to keep your "credit utilization ratio" under 30%.

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Published on: 1/20/22, 1:07 AM

When you need to make a purchase or pay a bill, credit cards can offer both convenience and the potential to save money if you're earning back some of what you spend in rewards. At the same time, you can also use credit cards to build credit history through healthy financial habits. 

What Is a Credit Card?
A credit card is a physical card that can be used to make purchases, pay bills or depending on the card, withdraw cash. The simplest way to think of a credit card is as a type of short term loan.
When you open a credit card account, your credit card company gives you a set credit limit. This is essentially an amount of money the credit card company allows you to use to make purchases or pay bills.

Your available credit is reduced as you charge things to the card. You then pay back what you spent from your credit limit to the credit card company. 

How Credit Cards Work
Credit cards can be used to make purchases online or in stores and pay bills. When you use a credit card for either one, your card details are sent to the merchant's bank. The bank then gets authorization from the credit card network to process the transaction. Your card issuer then has to verify your information and either approve or decline the transaction. 


If the transaction is approved, the payment is made to the merchant and your card's available credit is reduced by the transaction amount. At the end of your billing cycle, your card issuer will send you a statement showing all the transactions for that month, your previous balance and new balance, your minimum payment due and your due date. 


The grace period is the period of time between the date of a purchase on your card and the due date listed on your statement. During this period if you pay your bill in full by the due date, no interest charges accrue. 

But if you carry a balance month to month, your card issuer can charge you interest. Your credit card's annual percentage rate or APR reflects the cost of carrying a balance on an annualized basis. Your APR includes both your interest rate and other costs, such as an annual fee if your card has one. 

Most credit cards have a variable APR that's tied to the Prime Rate. This means your card's APR can change over time, though the CARD Act of 2009 sets strict guidelines on when credit card companies can and can't raise your rate.1

 Being 60 days late on making payments to your credit card can trigger a penalty APR, which can approach the 30% range.
Credit Cards vs. Debit Cards
A credit card and debit card may seem like the same thing but they're not. When you make purchases with a credit card, you're not actually spending any of your own money at that moment. Instead, you're spending the credit card company's money which you then have to pay back, potentially with interest. 

Debit cards, on the other hand, are linked to your checking account (they're not exactly the same as a prepaid card). When you make a purchase with your debit card, the money is automatically deducted from your bank account as soon as the transaction is processed. There's nothing to pay back later since the money has already been taken from your account.2

Debit and credit cards also differ in terms of their credit score impact. Using a debit card has no impact on your credit score because your bank account activity is not reported to the credit bureaus.

Credit cards, on the other hand, can impact your credit score directly. FICO credit scores, for instance, calculate your scores based on:

Payment history
Credit usage
Credit age
Credit mix
Inquiries for new credit
Making credit card payments on time can help your score while paying late could hurt it. Similarly, keeping a low balance compared to your credit limit can have a positive impact while maxing out your card limits can detract from your score. 

Another key difference between debit and credit cards lies in fraud protections. Federal law offers more fraud protections for credit cards than debit cards. This chart highlights your liability for unauthorized transactions with debit and credit cards. 

Published on: 1/20/22, 1:03 AM

What Is a Credit Card?
A credit card is a thin rectangular piece of plastic or metal issued by a bank or financial services company, that allows cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment. Credit cards impose the condition that cardholders pay back the borrowed money, plus any applicable interest, as well as any additional agreed-upon charges, either in full by the billing date or over time. An example of a credit card is the Chase Sapphire Reserve. (You can read our Chase Sapphire Reserve credit card review to get a good sense of all the various attributes of a credit card).


In addition to the standard credit line, the credit card issuer may also grant a separate cash line of credit (LOC) to cardholders, enabling them to borrow money in the form of cash advances that can be accessed through bank tellers, ATMs or credit card convenience checks. Such cash advances typically have different terms, such as no grace period and higher interest rates, compared to those transactions that access the main credit line. Issuers customarily pre-set borrowing limits, based on an individual's credit rating. A vast majority of businesses let the customer make purchases with credit cards, which remain one of today's most popular payment methodologies for buying consumer goods and services.

Published on: 1/20/22, 1:01 AM