Granting a credit limit increase can change a person’s life. In addition to making goods more affordable, a more powerful credit card can jack up a consumer’s FICO scores, which opens a world of financing opportunities in the future.
However, this privilege should be reserved only to financially responsible individuals. When the request comes from an imprudent person, approving it is a disaster waiting to happen. So, how do you know a consumer is unworthy? Watch out for the following red flags:
Having a stable employment and income verification system is a non-negotiable requirement to spot a bad candidate for a higher credit limit when you encounter one. One of the few reasons to raise a consumer’s credit limit is a bigger salary. Without compelling evidence that your customer makes more money now, there is no justification that this person has a better ability to repay debt.
Spotty work history can no longer suggest that a person has an inadequate income in itself. Nevertheless, you should still look for valid proof that your customer is in a better financial situation to deserve more buying power.
Little Credit History
A thin file is not an absolute reflection of a person’s creditworthiness, but it does not say a lot about a consumer either. Without rich payment history, it is difficult to assess how good at an individual is at handling finances.
You might be liberal enough to adopt more novel credit scoring models, like the UltraFICO scorecard, but seeing short credit reports should trigger more scrutiny on your part.
Low Debt-to-credit Ratio
This one is a bit ambiguous, but it does not make a lot of sense to grant someone a higher credit limit when that person has a lot of available credit already. Of course, you need to review a consumer’s credit history and even check their trended data to learn about their historical credit utilization rate.
Young Average Age of Credit Accounts
If a consumer who asks for a higher credit limit after recently opening a new credit account is a natural bad candidate. This behavior suggests that this person is bent on acquiring debt over a short period. Exercise caution before saying yes to a request before such an individual might not be prepared to manage more significant expenses.
Regular Partial Credit Card Balance Payment
Is your customer regularly paying just the minimum balance on their credit cards? It indicates that this person is not responsible enough to repay everything they owe on time and in full. Increasing their credit limit might encourage such a harmful financial habit.
Speaking of unpaid balances, seeing a foreclosure or a repossession in a person’s credit reports is enough grounds for denial.
Frequent Overseas Travel
Even responsible consumers lose their inhibitions when they travel abroad. They tend to spend more than usual, which can put them in a strange situation that can result in financial distress.
Despite noticing one or many of the said red flags in a consumer, you should still hear them out and find out why they need a higher credit limit from their mouth. A sensible reason should not serve as the determining factor, but it should carry some weight.
Credit limits exist for good reasons. Higher ones might bring you more business over the short term, but consider their long-term implications if you grant them to irresponsible customers.