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Credit Limit |
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Credit limit is the maximum amount of money that a bank or other money lender will lend to a money borrower, or the maximum amount of credit that a credit card company will allow a card holder to borrow on a single card.
A person's credit limit is determined by their credit risk. Credit risk is a very important factor when applying for credit, as it can affect the amount of credit that you receive and the rates of interest that you will pay. A person's credit risk depends on a range of factors, such as their employment stability, level of income, level of debt, credit history, and so on. By reviewing these factors, money lenders can determine how much risk they will be exposed to if they lend the person money. The level of risk will affect the amount of credit that they may be extended and it will also affect the rates of interest that they will pay.
People who have one or more significant assets, little debt, and a good credit history will generally be loaned more money (that is, have a higher credit limit) and at lower rates than people with no assets, high debt, and/or a poor credit history.
Some lenders will allow a borrower to exceed their credit limit, but this will only be under very strict conditions. For example, it may only be allowed for a very limited period of time. And, the credit limit may only be allowed to be exceeded by a very limited amount. In addition, the borrower may also incur fees, fines, or other penalties for exceeding their credit limit.
Credit limits provide some important advantages. For example, they serve to protect the borrower from getting in over their heads and borrowing too much money, and they also protect the lender from being over exposed to borrower's getting too far into debt.
Credit limits also cause some disadvantages. For example, they may severely restrict the borrowing capacity of the borrower, reducing the value of items that they can purchase. As a result, credit limits can also reduce the potential income received by the lender because borrowers are limited in what they can borrow.
Having a high credit limit can, in some circumstances, adversely affect your overall credit rating. Since you already have the potential to borrow a larger sum of money it would put a new potential lender in more risk if you decided to do so. In addition, a lower credit limit can also adversely affect your overall credit rating, especially if you use a greater percentage of your available credit. This is because it makes it appear that your are using up almost all the credit you have making you appear to have financial difficulties or problems managing your money.
So, it is all a balancing act - getting the right credit limit for each borrower without exposing either the lender or the borrower to unacceptable levels of risk. In addition, it is also important for the borrower the get an appropriate credit limit, otherwise their credit risk may be adversely affected.
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Credit Card Definitions > A - E > Credit Limit
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