How Banks Decide Your Credit Limit: In-House Scoring Models Beyond CIBIL

When an individual applies for a credit card, the initial assumption is that the credit limit is based solely on their credit score. While a score by credit rating agencies, such as CIBIL, plays an important role, it is not the sole determining factor. Banks have in-house models to assess lending risk for each customer. These models take into account income information, repayment history in the past, and behavioural spending.

For example, two individuals could share the same credit rating but receive very different credit limits. This would typically be based on their income levels and what the bank expects them to spend and repay each month.

Income and Spending Behaviour

The borrower's income level is one of the most important factors that influence the credit limit. People with regular jobs who receive fixed salaries are likely to be given higher limits than those without a regular income. Banks also consider the nature of employment and industry. A person employed in a steady industry may be given a higher limit than a person employed in a high-risk business.

Spending behaviour also matters. Banks monitor whether a customer spends on a regular basis, whether they are consistently making necessary purchases or making luxury purchases, and how often they use credit as compared to debit. A customer who frequently uses credit cards but pays in full may be awarded a higher limit over time.

Geographic and Demographic Risk

Credit card issuers also track risk on a geographic and demographic basis. Customers from neighbourhoods that have a poor history of default may be given lower limits, independent of their personal payment record. Age and life stage also influence the sanctioning process. Younger cardholders, especially new credit consumers, generally are granted lower initial limits until they prove a pattern of on-time payment.

Repayment History With Banks

Past experience with a bank carries significant weight. If the customer has accounts or loans in the same bank and has a history of keeping up with payments, then the credit card limit will be higher. However, late payments, no matter how small, might keep the limit low.

For instance, a consumer who has stable earnings and a clean payment history on savings account and mortgage will be very likely to receive a higher credit limit on a new card. A different consumer who has the same income but has made late payments on past loans will receive a very low limit.

Revisions and Reductions

Credit limits are temporary. Banks review accounts regularly and adjust them. Some customers' credit limits are automatically raised if they have shown consistent payment and positive use after a set amount of time. Others may have their limits reduced if the bank notices late payments or excessive balances outstanding.

Temporary adjustments also occur. During holiday times or travel seasons, temporary hikes are extended to customers in order to spur consumption. When the season is over, the limit is set back to the previous level.

Consider the example of a new graduate who has just joined work. His earning is small and he has no existing loan history. With a decent credit rating, his bank may first approve a small credit limit, say for only average monthly payments. When he clears bills on time for a year and has a consistent income, the bank may raise this limit.

In another case, a person of high income but poor repayment history can be sanctioned with a lower limit, whereas they earn more. This shows how repayment track record is as critical as income when setting limits.

A Complicated Choice

It requires an advanced process that combines outside credit rating with the bank's own risk assessment. Income, stability of employment, spending habits, payment history, and even geographical location play a role in the decision. Limits may change up or down over time depending on the customer's use of credit.