How Banks Determine Your Credit Limits

When you apply for a credit card or other lines of credit, you will be given a credit limit. This limit determines the maximum amount of credit you are allowed to spend at any one time. 

Knowing your credit limits and planning around them is the key to maintaining financial stability. However, what determines your credit limit in the first place?

BNM guidelines on credit limit

Before we look at the factors affecting credit limits, we must look at the guidelines set out by Bank Negara Malaysia (BNM). 

In order to be eligible, new cardholders must earn a minimum of RM24,000 per annum. Cardholders earning RM36,000 per annum or less are allowed to hold credit cards from a maximum of two issuers and the credit limit would be limited to 2x their monthly income per credit card user.

This is the general rule that all credit card issuers in Malaysia follow. However, this guideline does not apply if you are earning more than RM36,000 per annum. As such, you should consult each of your issuers individually to find out how much your credit limit will be. 

How is your credit limit determined?

As mentioned previously, credit issuers rely on a number of factors to determine what an individual’s maximum credit limit is. 

Credit limits are not permanent and may increase or decrease over time based on these factors. The following are some of the things that are considered before issuing your credit limit:

Credit score

The most obvious factor for determining one’s credit limit is the state of your credit score. These scores represent an individual’s creditworthiness and are typically recorded by various approved reporting agencies. 

Your credit score is affected by a number of factors, including credit history, amount owed, length of credit history, credit mix, and new credit. Since these affect your credit score, they also affect your credit limit.

Interestingly enough, your credit limit has a unique relationship with your credit score. This comes in the form of your credit utilisation ratio. In basic terms, it is the percentage of your credit that is being used at any given time. 

Keeping this ratio low, typically under 30% will show lenders that you are good at managing your debts. However, having a high credit utilisation ratio for extended periods of time may mark you as a high-risk individual, which can affect your credit score negatively. A worsening credit score could potentially lead to a lower credit limit so keep this in mind when spending your credit.

If you need a few pointers on how to improve your credit score, you can check out this article.

Credit history

To get into more detail, your credit history is a report of your debt repayment. It is recorded in your credit report, which details the number and types of your credit accounts, how long each account has been open, amounts owed, the amount of available credit used, whether bills are paid on time, and the number of recent credit inquiries. 

It is one of the most crucial pieces of information that reporting agencies and lenders use to determine both your credit score and credit limit.

Debts owed

Credit issuers prefer to offer credit to individuals that are low-risk. This ensures that they will be repaid in a timely manner. The more debt you owe on your record, the higher-risk you are. 

Credit issuers will assume that those with more debt on record have trouble paying them off or are taking a big risk with their finances. As such, they are likely more reluctant to offer higher credit limits on the off chance that the individual may not be able to repay their debts.

Length of credit history

Length of credit history describes the age of the accounts on your credit reports. Another way to describe the length of credit history is the period of time the accounts on your credit reports have been established. 

Generally speaking, a longer and older credit history may be a good sign for your credit score and credit limit, as it may show that you have successfully managed your credit accounts, thus showing a higher level of responsibility than someone who just started.

Credit mix

In simplest terms, a credit mix refers to the types of credit accounts that you have. These include things such as mortgages, loans, credit cards, etc. While it may not be as important to calculating credit scores and credit limits, it is still an important part of your overall credit report. 

Credit lenders and issuers like to see you have a diverse mix of credit. It lets them know that you have the ability to manage different types of credit accounts in a responsible manner over time.

What happens if you go over your credit limit

There are ways to go over your credit limit, but it is recommended not to do so. While spending over your credit limit may provide short-term relief, it can cause long-term financial issues, including fees, debt and can negatively affect your credit score. A good habit to build is to never max out your cards and avoid spending anywhere near your credit limit.

So long as you spend your credit according to your lender’s terms, and avoid exceeding (or even coming too close to) your limits, you will be far more likely to build a good credit history, which can open up other financial opportunities.