Credit limit strategies walk a fine line: too much and credit losses jump; too little and you choke off profits. Are your credit limit management strategies maximizing profits?
Credit limits can be used to boost response rates by offering an appealing amount of credit. But lenders must ensure that borrowers can repay that amount. This is a function of both the risk of the individual and their capacity to repay. A simple approach to determine proper limit size is to matrix these 2 risk dimensions so that low-risk borrowers are entitled to higher limits; higher risk customers are assigned lower limits.
For existing customers managing credit limits impacts balances, revenues and retention. The customer response will differ by segment. Heavy borrowers may borrow more but increase risk. Transactors may or may not change their behavior depending on whether current limits constrain their spending. Of course, limit management attuned to individual customer needs can make sure that limits never limit profitability.
Credit limits cannot be removed from authorization strategies for credit cards. Issuers tend to grant greater flexibility to low-risk customers both in terms of the amount a customer can exceed their limit as well as whether authorizations are granted following a missed payment. The impact on subsequent profit must be tracked carefully to determine whether the strategy is well designed or needs adjustment.
One thing that rarely is factored into evaluating authorization strategies is how a recent credit limit increase impacts authorization strategy results. Do limit increases decrease the number of over-the-limit authorization requests? How do they impact the subsequent profitability of the authorization strategies? Is it more profitable to have tight limit policies with more flexible authorization strategies? Or vice versa?