@s_haliz wrote:Recently I have read some posts in this forum and one question came to my mind:
When you apply for a new credit card, who gets the preference (i.e. approval and higher CLI)? The one who have large total available credit limit (and low utilization of say about 3% and no more than 10% on any card) or the one with relatively lower total available credit limit but 70% of utilization.
Let say,
1. Total vailable credit is $150,000. Utilization is 3% ($4,500).
2. Total available credit is $6,000. Utilization is 70% ($4,200).
I know there would be many other factors. But let assume they are all equal for discussion purpose. Who the lender would give a preferential treatment with approval and higher CL?
Added: Who poses more risk?
Everything can't be equal between the two profiles. The first profile almost certainly has multiple >$5k signature accounts. The first profile is almost certain to have a much longer AAoA. The first profile is much more likely to have a PIF history. Probably a larger reported income.
The first profile will have easier approvals with much higher starting limits, but less potential for later cli's .
If the algorithms work right, the risk/reward to the lender for what each profile is offered should be roughly equal. That is the premise that makes credit "fair". Whether it actually works out that way is a different discussion.
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850 FICO8 since 2015, Thanks MyFICO - 5+ years since last HP
@s_haliz wrote:
@bada_bing wrote:
@s_haliz wrote:Recently I have read some posts in this forum and one question came to my mind:
When you apply for a new credit card, who gets the preference (i.e. approval and higher CLI)? The one who have large total available credit limit (and low utilization of say about 3% and no more than 10% on any card) or the one with relatively lower total available credit limit but 70% of utilization.
Let say,
1. Total vailable credit is $150,000. Utilization is 3% ($4,500).
2. Total available credit is $6,000. Utilization is 70% ($4,200).
I know there would be many other factors. But let assume they are all equal for discussion purpose. Who the lender would give a preferential treatment with approval and higher CL?
Added: Who poses more risk?Everything can't be equal between the two profiles. The first profile almost certainly has multiple >$5k signature accounts. The first profile is almost certain to have a much longer AAoA. The first profile is much more likely to have a PIF history. Probably a larger reported income.
The first profile will have easier approvals with much higher starting limits, but less potential for later cli's .
If the algorithms work right, the risk/reward to the lender for what each profile is offered should be roughly equal. That is the premise that makes credit "fair". Whether it actually works out that way is a different discussion.
Great points. Only last paragraph is somewhat unclear to me. Are you saying that let say if the lender have their own internal score (assuming based on Risk), two person with identical score should get same or almost closer to same credit limit when they had applied for a new card?
"Score" usually means an assessment of risk of no repayment. That's all Fico is, a numerical assessment that you will repay your debts. It doesn't measure how much credit limit is appropriate because income and assets are not components of FICO. It is easily possible for a multi-millionaire and a minimum wage worker to have identical FICO's. Another interesting thing is that FICO is not linear, there is about a doubling of risk of non-repayment for every 20~40 point drop in FICO score. A person with an 800 score is at least 4 times less likely to default than a person with a 720 score.
The algorithms they use to determine CL has FICO as one component, but income, assets and payment-balance history are other big components. A thin file, minimum wage worker with a 720 score isn't going to get a CL anywhere close to a 6 figure earning, middle age dude with 40 accounts on his file and the same 720 score.