There have recently been complaints of disparity in the credit decisioning process for a new credit card product. In response to the complaints, additional consumers applied for the cards together and some claim to have noticed the same disparity in credit limit granted by the bank.
There has been a ton of misinformation posted in a flurry of angry tweets surrounding the situation. Many assumptions have been made about bias in the “black-box” algorithm that approves and decides credit limits for many new credit card products. We are here to help you sort truth from fiction in this highly confusing situation.
What can I do if my partner and I received different limits?
The first thing you should do is to gather all the facts and analyze for yourself why you may be dealing with two different outcomes. This starts with obtaining both party’s credit report. In the United States, citizens are entitled by law to one free credit report per year. You and your partner can order your free annual credit reports from the official government-sponsored site, annualcreditreport.com. If you have already exhausted your free credit report, or would like to obtain your credit score, you can get those from MyFICO. Please keep in mind that FICO is the only scoring vendor banks and lenders use, although some banks and lending institutions develop their own internal scoring algorithm. MyFICO sells many different versions of their FICO score for different industries and segments.
Why you need a report and not just a score
Scores are used primarily for approval and setting of interest rate. Since credit limit is not a percentage or proportional value but rather one that is going to vary based on geographic, economic area, income and other factors not directly related to your credit performance, it is decided using your high credit, existing credit limits and income. Normally, whether an individual’s credit performance is excellent or average, credit limits start small and grow as you show care in using your credit wisely and paying on time.
What are the key variables I should compare?
Here are the three factors that primarily determine your credit limit in a traditional lending model.
- High credit - Your high credit amount is the highest amount of money you’ve borrowed and successfully made payments on. You will find this number as it pertains to revolving credit by looking at the “high credit” amount listed with each revolving credit card account on your report.
- Total credit limit - Your total credit limit is the total of all revolving credit limits on your report. This number will normally be a little easier to find, as it’s usually given as a total at the top of your report for your convenience.
- Income – Well, you know where to find this.
Another factor which many banks look at is the largest credit limit you have been granted on a revolving credit card so far. For example, if you have maintained a credit card with a $5000 credit limit, paid it on time, and have not maxed it out, the bank will be inclined to grant you a credit limit of anywhere from 120% to 200% of that amount. You are likely to receive a credit limit between $5000 and $10,000, but not over. That is why it takes time to build and grow your available credit, whether your credit score is 650 or 850.