There is always that element of surprise and questions as to why you are approved for a huge limit and others are approved for only half as much. The truth is that your final figure is always determined by a set of rules that are set by Australian banks and other financial institutions. These rules will always guide you in planning your finances and increase your chances of attaining the real limit you need.
The Basics of Credit Limits
A credit limit is simply the total amount that your bank is willing to lend you at any given time. This is also known as your total borrowing capacity. The bank wants to make sure that you have enough money for your monthly repayments without causing you any hardship. This is why they will always want to know your personal information in order to get that balance. However, it is essential to note that every bank has its own rules and ways of determining your credit limits, though the rules themselves are almost similar in all institutions.
Key Factors That Lenders Consider
Your income and employment status are probably the first things that will come to mind. A person who works full-time and earns a lot is likely to be given a higher limit compared to someone who works casually.
Additionally, banks will also assess your debt-to-income ratio. This is where your total monthly debts are measured against your monthly gross income. Therefore, even if you have a high income, if you have massive debts such as a mortgage or personal loans, banks will not be willing to give you more credit. Your living costs also form an integral part of your credit assessment. Banks will assess your rent, food, transport costs, among other costs, in order to determine your true income.
The Role of Your Credit Score
Credit reporting agencies such as Equifax, Experian, and illion have comprehensive records of your credit history. Your credit score is simply a numerical value that represents your credit history. A high credit score indicates that you have a history of paying your bills on time. This makes banks trust you with more credit, and products like ING cashback credit cards, since they know that you have been responsible in paying your debts in the past.
However, if you have defaulted on your loans or have applied for credit on numerous occasions, your credit score will be low. This makes banks wary of lending you more credit. Every time you apply for credit, your credit history is affected. Therefore, it is recommended that you limit your credit applications.
Impact of Responsible Lending Obligations
The Australian laws have a significant impact on the credit card industry. Under the National Consumer Credit Protection Act, lenders are subject to Responsible Lending Obligations. These laws require banks to assess your financial situation and make sure that the credit product they offer you is suitable for you. They are also required by law to calculate whether you can pay off the entire credit limit within three years, considering the highest interest rate that can be charged on your credit card. These laws are in place to prevent debt traps, which means you may get lower credit limits than you thought you would.
How to Take Control of Your Borrowing Power
Your credit card limit is the result of an evaluation of your financial condition, legal factors, and your previous record of borrowing. If you wish to have a higher limit in the future, your strategy should be to minimise your existing debts and make timely payments. You may also contact your bank and ask them to reconsider your application if your income has recently been raised. Once you are aware of the process, you are in the driver’s seat!