What Is Credit Card Underwriting?

In your lifetime, you will likely apply for one or more credit cards. In 2020, 79 percent of Americans owned a credit card, an estimated 253 million American adults. Indeed, credit cards are one of the most popular forms of payment as it is convenient, fast, and easy to use online and in-person. As credit cards grow in popularity, lenders will continue to be cautious regarding extending new credit cards to applicants. If you want to discover what credit card underwriting is and why it’s important, keep reading below. 

What Is Credit Card Underwriting? 

Credit card underwriting refers to the process of determining a person’s credit limit. Underwriting uses a combination of mathematical formulas, tests, and analyses to approve or deny a credit card application. This is an essential step to help businesses decide who to approve, at what rate, and how much to offer. Suppose an applicant receives a high credit limit. In that case, this typically indicates that the person is viewed as trustworthy and dependable based on their credit history, debt-to-income (DTI) ratio, and other factors. Debt-to-income ratio is the percentage of how much money a person spends compared to how much income they have. On the other hand, if an applicant receives a low credit limit, this usually indicates that the person does not have sufficient credit history, income, or debt-to-income ratio. Indeed, this type of applicant poses a greater risk of not repaying their borrowed money in full and on time.  

While every company uses a different approach, there are general guidelines used by most companies. Underwriters use the following basic principles to determine an applicant’s credit amount.  

Credit Limit 

Credit limit or credit line is the amount of credit that a card issuer offers to cardmembers. An underwriter will review an applicant’s credit history, DTI ratio, assets, and income. This information will help determine whether to approve an applicant for a credit card. Once approved, customers can increase their credit by being financially responsible and paying their balances on time.  

Furthermore, there are two main types of credit cards – those with preset credit limits and those without preset limits. Most credit cards are issued with preset limits, which can increase upon request. Additionally, credit cards can also have no-preset limits, which can increase or decrease as needed based on a customer’s spending needs.  

Credit History 

When reviewing credit card applications, underwriters will look at an applicant’s credit reports and gross yearly income. Credit reports will check the length of a person’s credit history, repayment history, and the number of active credit accounts. Credit accounts may include mortgages, personal loans, student loans, and vehicle loans. Underwriters will also examine how many inquiries have been made on an applicant’s credit reports and look for negative marks. Negative marks may include bankruptcies, collections, civil judgments, or tax liens. Indeed, a person’s credit history will determine whether they are approved for credit and how much credit limit to extend to the customer.  

In general, a person with a good credit score will qualify for lower interest rates, higher credit limits, and more benefits compared to those with low or nonexistent credit scores that fail to show credit dependability. A low score will likely have high-interest rates, lower credit limits, and fewer benefits like cashback rewards and discounts.  

Additional Factors 

As mentioned above, the underwriting process may be different for every company. Some card issuers will take a closer look at an applicant’s credit reports to identify the credit limits set on other cards. Other issuers may review different scores, including credit and bankruptcy scores. Further, issuers may review an applicant’s work history and DTI ratio, which will be used to determine how much risk that an applicant poses to their company. Indeed, these factors help issuers determine how much funds to offer applicants because they reveal a person’s financial history, spending habits, and risk levels.  

Why Is Credit Card Underwriting Important? 

No matter what type of credit card you are applying for, it’s a good idea to understand the credit card underwriting process. Why is that? By understanding the different factors used to determine your credit approval, you can prepare yourself for success. Request free credit reports to examine your open credit accounts, credit scores, and any odd or negative marks against you. If your credit scores are low or nonexistent, you can work on building good credit. You can build credit by paying your bills and credit card balances on time, only buying items you can pay off within a reasonable amount of time, and ensuring that you have accounts with your name on them. Over time, these healthy spending habits will help you build good credit. The next time you apply for a credit card, you will increase the likelihood of getting approved for lower interest rates and higher credit limits.  

We hope you enjoyed this week’s insider look at what credit card underwriting is and why you should care. Maybe you need to make a big purchase but don’t have the cash upfront. Or you may have an emergency that requires money today. While the reasons vary, you likely own at least one credit card. If you own a business that stores or handles sensitive card data, it’s vital to mitigate the risks of theft, fraud, and not being PCI compliant. At TokenEx, our cloud-based tokenization platform can help protect and secure your customers’ credit card information. This will give you more time to focus on growing your business and less time worrying about PCI compliance and data breaches. 

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Topic(s): payments