Are you looking to apply for your very first credit card? Are you wondering how much the issuer will offer when it comes to your credit limit?
Applying for a credit card is an exciting time for consumers. In fact, 62% of American adults between 50 and 64 years of age have at least one credit card. But beyond the advantages a credit card brings, you need to understand how credit cards work.
As a first-time applicant, what is a good credit limit?
Continue reading below as we dissect the credit card, the credit limit, and how to manage the latter.
Determining What Is a Good Credit Limit
Applying for a credit card is relatively easy. There are several credit card issuers that offer excellent deals in terms of rewards, annual fees, and interest rates. But before these banks approve your application, they will first look into a number of key factors.
In addition, they will also use these factors to determine how much credit limit they will grant a first-time applicant like you. Let’s take a look at some of these factors below:
Your credit score is a statistical number that shows whether or not you are financially trustworthy. The typical credit score ranges between 300 and 850. The higher your credit score is, the better you will look in the eyes of banks.
A higher score sends the issuers a message that you can pay your debts on time. In turn, the issuers will not see you as a liability.
You can attain a high credit score if you consistently pay your bills on time. You can also score high if you can keep your existing debts low.
Your goal is to have a score of 800 to 850. Hitting this range will boost your chances for approval. Keep in mind, however, that your credit score is not the end-all and be-all in terms of approval.
Another factor the banks will look into is your monthly income. What the issuers will do is they will weigh your overall income in relation to your existing debts. This is what they call the debt-to-income ratio or DTI.
The DTI is basically the percentage of your gross income that goes straight to your debts. A low DTI means only a small percentage of your monthly income goes to your debt payments.
Banks prefer credit card applicants who have low DTI ratios. Generally, banks prefer applicants who have a DTI ratio that is lower than 36%.
You can also expect the banks to look into your monthly mortgage and rent. Similar to your monthly income, your monthly rent payments can also tell issuers how good of a payor you are.
It will hurt your chances for approval if you have a history of missing your monthly payments consecutively. On the flipside, your application will get a major boost if you are paying your mortgage on time and without any miss.
Though your employment history does not directly affect your credit score, it is still something that banks look into. Are you someone who tends to jump from one company to another in just a matter of months? Then this will not look good in the eyes of the credit card issuers.
The same thing goes if you lose your job. Keep in mind that one of the vital things banks are looking for in applicants is financial stability. They will look into how you are able to pay your debts during your period of unemployment.
If your employment history is far from sterling, it may also leave a negative impact on your credit history. These dry spells of unemployment could mean several months of missing your monthly rent. Failing to pay your monthly debts equate to lower credit scores.
They will also look into what we call the hard inquiries. A hard inquiry pertains to the instances when an issuer looks into your credit in regard to your application. Hard inquiries over the past two years can remain in your credit reports.
If you have several hard inquiries in your credit reports, some banks consider those as red flags. Too many hard inquiries could mean that you are low on cash and you are attempting to open multiple accounts.
This also means you are about to enter a deep debt hole. In the eyes of credit card issuers and lenders, you are a high-risk borrower who likely needs a lot of bad credit loans.
Low for Starters
Now that you know some of the key factors banks look into, we can now move on to the credit limit itself. As a first-time applicant, you need to manage your expectations. Thus, expect a low credit limit.
This is because you do not have an existing history of credit card usage. The banks do not have a reference that exactly shows how responsible you are as a credit card owner.
Since they do not know how much credit limit you can handle, they will often err on the side of caution. Hence, they will likely give you a small credit for a start.
When it comes to the range of the credit limit, banks can give you as low as $100. Of course, this depends on the factors we discussed earlier.
But if you applied for a MasterCard or Visa, the issuer may give you a slightly bigger credit limit. Sometimes, larger banks issue $300 to $500 credit limits to first-time applicants.
Managing Your Credit Limit
It is normal for first-time applicants to wonder what is a good credit limit to start with. It is also normal to aspire for a larger credit limit in the foreseeable future.
What you can do is to manage your low credit limit properly. Let’s take a look at some tips that will help you manage your low credit.
Keep Monthly Charges Low
You can start by keeping the total amount of your monthly charges at a minimum. This is a priority for credit card holders who are working on a low limit. Your goal is to maintain the lowest possible balance that you can.
Pay on or Before Due Date
Another integral part of managing a low credit limit is sending your payments on time. Take note of the due date on your monthly statements. The goal is to settle your payments on or before the said date.
By paying on time, the issuer will report your payments to the credit reporting agencies. In turn, this will reflect positively in your overall credit scores.
The more on-time payments you make, the higher your credits scores are in the long run. In addition, you can also avoid incurring those late fees.
Cover the Entire Balance
Lastly, you need to develop the habit of paying your actual bill. This means paying off your entire balance.
Sure, the credit card allows you to pay just a portion of the entire bill. But if you can cover the entire amount, don’t hesitate to do so. This will save you from paying the interest.
Believe it or not, half of the credit card holders in the United States max out their cards. This means they tend to find themselves in a huge debt hole. At the end of 2018, credit card debt in the country already reached $870 billion.
That number is an all-time high according to the Federal Reserve Bank of New York.
Going Big the First Time Around
Interestingly, there are a couple of ways that may help you secure a larger credit limit the first time around. Here’s what you can do:
If you are still in the process of credit-card hunting, you can opt to apply jointly. You can apply with your spouse or parent. You can also apply with a close friend or colleague in the office.
Just make sure that the person you are applying with has a solid credit history. They must also have a good and stable income.
If you and the other party maintain your account’s good standing, it will also reflect on your personal credit record.
The Secured Card
Another option is to apply for a secured credit card. A secured credit card’s credit limit depends on the security deposit that you pay.
Go for a secured credit card from leading banks. Some of these banks accept security deposits for up to as much as $10,000.
Get the Right Credit Card, Today!
What is a good credit limit? At the end of the day, you need a limit that suits your financial circumstance, spending habits, and needs. Don’t jump into the first bank that offers you a credit card. Take time to conduct your research and due diligence.
We invite you to check out online resources. We discuss different topics concerning credit cards and different kinds of loans.
You can send us a message or give us a call. Let us know what you need and let’s work on achieving your financial goals faster.
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