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Credit Limit Formula:
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Credit limit calculation determines the maximum amount of credit that can be extended to a borrower based on their income, a predetermined factor, and existing debts. It helps lenders assess risk and borrowers understand their credit capacity.
The calculator uses the credit limit formula:
Where:
Explanation: The formula calculates available credit by multiplying income by a risk factor, then subtracting existing debt obligations to determine the safe lending amount.
Details: Proper credit limit calculation helps prevent over-indebtedness, maintains healthy debt-to-income ratios, and ensures borrowers can manage their credit obligations without financial strain.
Tips: Enter income and debts in the same currency units. The factor typically ranges from 0.2 to 0.5 depending on the lender's risk assessment criteria and the borrower's credit profile.
Q1: What is a typical factor value used by lenders?
A: Most lenders use factors between 0.2 and 0.5, with higher factors indicating better creditworthiness and lower risk.
Q2: How often should credit limits be recalculated?
A: Credit limits should be reviewed annually or whenever there's a significant change in income, debt levels, or financial circumstances.
Q3: What income sources are considered in the calculation?
A: Lenders typically consider stable, verifiable income sources including employment income, business income, investments, and other regular earnings.
Q4: How do existing debts affect credit limits?
A: Higher existing debts reduce available credit capacity as they represent ongoing financial obligations that must be serviced.
Q5: Can credit limits be increased over time?
A: Yes, credit limits can be increased based on improved credit history, increased income, reduced debt levels, and demonstrated responsible credit usage.