How Much Credit Limit to Grant to Successful Credit Card Application?
Banks have to determine what the amount of credit limit is appropriate for each successful applicant. There is no hard and fast rule on this. This is a difficult aspect for the banks to decide.
One important omission for the example given in the earlier credit scoring system was credit limit. This is because many banks regard it irrelevant in establishing the criteria for the credit scoring system.
The conventional way of assessing credit worthiness was to look at the three “C” which are the applicant’s character, capacity and collateral.
Character
None of 3 “C” is really relevant to a credit scoring system except that bad character could be evidenced by a past poor payment records or impending legal case against the applicant.
Capacity
Capacity is salary minus commitments. It is less significant to the decision whether to approve the application or not although it may be relevant in establishing a credit limit.
Collateral
Collateral is the provision of security which nowadays is not required for the majority of consumer transactions.
So what is available upon which to base a decision? The bank wants to give the maximum limit possible so as to encourage heavy use of the card. The customer may want a high limit, he may be proud of it. If he has another card he may be insulted if the limit now given is way below than that on his existing card.
These are all pressures to give a high limit to the applicant. Against this are worries that a limit may lead to arrears or even bad debts. The problem of over commitment is always high in a bank’s thinking. In the absence of any other guidance, perhaps a bank manager’s recommendation or information about the credit limit on the card already held by the applicant, the applicant’s salary is taken as the guide.
The credit limit given to a successful application, vary from bank to bank and from country to country. The limit given equivalent to 100% of the applicant’s monthly salary is considered prudent and is about right for a new cardholder. Once the banks are more comfortable with the new cardholder’s spending habit, the limit can be increased after a period of time such as three months or more depending on the respective bank’s policy. The terms and conditions of cardholder can avoid this problem by not setting a limit, at least not one known to the cardholder.
Credit card interest is the biggest line of revenues in credit card business. Therefore, the bank places a lot of important in granting credit limits to successful applicants.
