Credit limit

Definition

A credit limit is the maximum amount a borrower is allowed to charge on a credit card or line of credit. It is set by the lender based on factors like income, credit score, and repayment history.

5 Must Know Facts For Your Next Test

1. Exceeding your credit limit can result in fees and penalties.
2. A high credit utilization ratio, which is the amount of credit used compared to the credit limit, can negatively impact your credit score.
3. Lenders periodically review and can adjust your credit limit based on your financial behavior.
4. Your initial credit limit is often determined by your income, existing debt levels, and overall financial health.
5. Understanding and managing your credit limit effectively helps in avoiding debt accumulation and maintaining good financial standing.

Review Questions

• What factors influence the setting of a person's initial credit limit?
• How does exceeding your credit limit affect your financial situation?
• Why is it important to monitor your credit utilization ratio?

Related terms

Credit Utilization Ratio: The percentage of available credit that has been used by a borrower.

Over-the-Limit Fee: A penalty charged when the borrower exceeds their established credit limit.

Credit Score: A numerical representation of a person's creditworthiness based on their borrowing and repayment history.