What Is an Initial Line of Credit?
Credit means trust. That's why lending -- including credit cards -- is about relationships. When a lender extends credit either through a bank line of credit or an unsecured credit card, the initial amount of credit available reflects how much faith a lender has in a borrower. There are several factors that go into a financial institution's decision on how much initial credit to offer and several things that may change a borrower's available credit.
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Credit History
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Lenders examine an applicant's credit history when determining how much credit to initially extend. Someone with an extensive credit history with a record on making payments on time and honoring obligations may receive a substantial initial credit line. Those who have late payments, defaults or very little credit history typically receive low credit limits. A person's overall credit score listed on reports from the three major credit bureaus heavily influences lenders in their decision making. Applicants can review their credit scores and reports before applying for credit. Credit bureaus are legally required to offer one free credit report per year and numerous services offer them online for fees.
Income and Assets
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Naturally, lenders want to know if an applicant has the means to repay money borrowed. Annual income is therefore a very important considering in determining an initial credit limit. Naturally, the higher a person's income, the greater her likelihood to get a higher initial line of credit. Some lenders -- particularly banks considering issuing an open line of credit -- will also examine a person's financial assets. Owning a home, a vehicle, securities and even jewelry may result in a higher initial line of credit.
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Debt-to-Income Ratio
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A person with a healthy income and a good credit history won't always get a high initial line of credit. Lenders often consider those with significant amounts of debt in relation to their annual incomes to be risky borrowers. Therefore, opening credit limits may be modest until a borrower establishes a reliable payment pattern or reduces his overall debt.
Changes
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Initial credit lines are -- as the term suggests -- temporary. As a financial relationship progresses, a lender may increase or decrease a line of credit based on a borrower's reliability. Borrowers who make substantial payments on time, every time, are likely to see an increase in their credit limits -- sometimes without even having to ask. Credit card companies monitor credit history and personal payment patterns carefully and can make adjustments at any time. Changes in employment status, marital status, assets, income and credit ratings can all impact a lender's perception of risk well after an initial line of credit has been altered.
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References
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