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
- Exceeding your credit limit can result in fees and penalties.
- A high credit utilization ratio, which is the amount of credit used compared to the credit limit, can negatively impact your credit score.
- Lenders periodically review and can adjust your credit limit based on your financial behavior.
- Your initial credit limit is often determined by your income, existing debt levels, and overall financial health.
- 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?
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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.
