How does a lender decide what your credit limit will be?

A reader, Amit , asked this question:

How does credit limit decided by Credit Card issuing company? If income proof is submitted, what multiplier is given as credit limit, if surrogates are used then what is the different ways of deciding ideal limit to be given?

Amit

Amit,

The credit limit that you end up with is decided on an individual basis per lender.

This is usually done by using your credit score. Credit scores within a certain range are offered that bank’s standard lines of credit.

You credit score also determines the interest rate of your credit cards.

This is all done pretty seamlessly, via computers. It’s a little rare to have an individual look at a credit application for a credit card. Usually it’s only done on very exclusive cards.

As far as checking to verify your income, some credit card companies initially do not. Many rely strictly on your credit score, as well as any public records (judgments and/or bankruptcy) that appear on your credit report.

In some situations, credit card companies will ask for real income verification – like Amex did to Jason not too long ago. That is usually done in the form of submitting your tax documents to the issuing bank.

There are also several income verification agencies out there that lenders can subscribe to. Again, I don’t believe most companies do.

As far as your credit limit being a multiplier of your income, that formula varies by lender, there is no industry standard for setting credit limits that I am aware of.

You can find a little more information on the process here:

Don’t forget that you can also shift your credit limits around once you apply for a card.

What happens to the money owed on a house during a short sale?

A reader, Alan, had this question:

My wife and I went through a short sale in 2008. We were upside down by about 150k. What happens with this difference? It seems that we can never get a straight answer. We will be filling with our accountant in a few weeks. Any and all help would be greatly appreciated.

Alan

Thanks for your question Alan.

During a short sale, the money that you would have still owed on your home loan is the bank’s problem. If they agree to a short sale, then it means that they are willing to take a loss on the loan. Now, your lender may be entitled to ask you to pay all or part of the difference, it just depends on the bank.

This article from Business Week sums it up pretty well in the first couple of paragraphs:

For all the homeowners who are upside down and can no longer make their mortgage payment (because of either a job loss, divorce, or an option ARM that’s resetting higher), up to now the only option was, well, letting the bank foreclose. That’s not a good option since a foreclosure sticks on your credit record for at least 10 years.

But some experts are now advocating a “short sale.” This is a case of a distinction with a difference: If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank’s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).

If you haven’t received any bills from your bank, then you are probably in good shape. It never hurts to check on the situation though, because you don’t want this debt coming back to bite you later.

Call your bank to verify that everything is well, and make sure that you check your credit reports. Your credit reports will quickly show whether or not any portion of this debt belongs to you, or is showing up as delinquent.

You could also contact a lawyer in your state. (Some laws are state-specific) and ask them about your liability in a short sale.

Have a question for us? Leave a comment below!

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This entry was posted on Wednesday, March 18th, 2009 at 07:34 and is filed under Credit Cards FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.