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A credit limit is the maximum amount of credit that a potential lender will extend to a debtor for a particular line of credit; for example it is the most that a credit card company will allow a card holder to take out at once on a card and is usually stated in the terms and conditions of the credit card after the application has been approved. In the case of instant approval credit cards the credit limit may or may not be decided with the initial response as the instant response credit card is an indication of credit worthiness but how much credit is available may require human input.
Credit limits are based on a variety of factors ranging from an individual’s ability to make interest payments, an organization’s cashflow and/or ability to repay the principal, to the credit standards employed by the lender. A credit limit is also based on the borrower’s recoverable assets in the event of default.
Credit limits are most often seen by consumers in the form of revolving lines of credit known as credit cards. They are also used in the extension of open account credit terms from business to business. Other examples include home equity lines of credit, residential mortgages/owner-occupier home loans with redraw facilities, a commercial line of credit or a Bank guarantee. The limit imposed in most cases is fixed for the life of the product, except in the case of credit cards that may be raised upon each application received by the card holder or offer by the card issuer.
Some credit card users do not know their credit limits until they exceed the limit. This can mean that a credit card user can be refused on a card transaction. Some credit card purchaes will be accepted when the credit limit is exceeded, but this can be at the price of a penalty. Some credit cards will charge a penalty whenever a credit limit is breached, and some will charge a smaller penalty for every transaction over the credit limit. This can be very expensive.
Credit limits can also be an important factor in determining ones credit rating. One factor is whether the person is close to the limit on any of their credit cards. If the ratio of the credit card debt to the credit limit is less than 50% then any effect on the credit rating could only be positive. However when the proportion of credit taken up is higher then the credit score is affected as this is often an indication that the consumer is in need of credit. A way around this is to increase the limit obn the card if that option is available. Increasing the limit on your credit card is as simple as calling the lender and requesting the increase.
