A credit limit is the maximum amount of credit that a financial institution, such as a bank or credit card company, extends to a borrower as part of a loan or line of credit. It is the maximum amount that a borrower is allowed to charge on a credit card or borrow as a loan.
For example, if you have a credit card with a $5,000 credit limit, you will not be able to charge more than $5,000 on that card. Similarly, if you have a personal loan with a $10,000 credit limit, you will not be able to borrow more than $10,000 through that loan.
Credit limits are usually determined based on a borrower’s creditworthiness, which is a measure of their credit history and financial stability. Factors that may be considered when determining a credit limit include a borrower’s credit score, income, debt-to-income ratio, and employment status.
It’s important to note that using a high percentage of your credit limit can have a negative impact on your credit score. This is because credit utilization, which is the amount of credit you are using relative to your credit limit, is a key factor in determining your credit score. Using a high percentage of your credit limit can indicate to lenders that you are over-extending yourself financially and may not be able to manage your debt responsibly.