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Credit limit is a money term you need to understand. Here’s what it means.
What is a credit limit?
The term credit limit refers to the maximum amount that the credit card issuer will allow you to borrow on your line of credit. It is determined by several factors, including your income and your overall financial condition.
Every time a credit card issuer approves you for a credit card, it sets a limit to how much you can spend. This is called your credit limit. Once you’ve reached your credit limit, you cannot use your card until you pay down your balance enough to use all or some of it. Some credit cards may allow you to go over your limit but will charge an over-limit penalty fee.
Lenders decide how much of a credit limit to give you by assessing your entire financial picture. This includes the income you listed on your credit card application, as well as credit-related factors such as your credit history and how much debt you already have. This includes how much debt you’re carrying compared to how much available credit you have.
For credit backed by collateral (for example, a home equity line), the lender will base the credit limit on how much equity you have in the home.
Your credit limit isn’t set in stone. In fact, it may change several times during the time you have the card. If you stay in good standing with the lender, it may automatically raise your credit limit periodically.
Credit limit example
If a credit card issuer gives you a credit limit of $2,500, that’s the maximum amount you can have charged to the card at any given time. If you spend $1,900 on your card, you’ll then have $600 you can spend, without incurring a penalty or not being able to charge any more on the card.
Interest and finance charges also count toward the credit limit. So, if you’re carrying a balance and accruing interest, this will reduce the amount of money you can spend on the card. For example, if your finance charge is $18, then you’d have $582 available to spend on your card.
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