1. What is the Credit Limit Calculation?

The credit limit calculation estimates the maximum amount of credit that can be extended to a borrower based on their net income from financial statements and a predetermined factor.

2. How Does the Calculator Work?

The calculator uses the credit limit formula:

Where:

• \( Net\ Income \) — Annual net income from financial statements (currency/year)
• \( Factor \) — Multiplier determined by the lender (dimensionless)

Explanation: The equation calculates a reasonable credit limit based on the borrower's income and the lender's risk tolerance.

3. Importance of Credit Limit Calculation

Details: Proper credit limit calculation helps lenders manage risk while providing borrowers with appropriate access to credit based on their financial capacity.

4. Using the Calculator

Tips: Enter net income in currency/year and the factor (typically between 0.2-0.5). All values must be valid (income > 0, factor > 0).

5. Frequently Asked Questions (FAQ)

Q1: What is a typical factor value?
A: Factors typically range from 0.2 to 0.5, with 0.3 being a common starting point for many lenders.

Q2: How often should credit limits be reviewed?
A: Credit limits should be reviewed annually or whenever there's a significant change in the borrower's financial situation.

Q3: What other factors affect credit limits?
A: Credit history, debt-to-income ratio, and other financial obligations may also influence the final credit limit decision.

Q4: Is this calculation used for all types of credit?
A: This is primarily for revolving credit like credit cards. Other credit types may use different calculation methods.

Q5: Can the factor change over time?
A: Yes, lenders may adjust the factor based on the borrower's creditworthiness and economic conditions.