What Is a Credit Limit?

The first step to getting a hold on your finances is understanding all the key terms associated with borrowing, loans, credit and debt. Even the simplest terms deserve a little more attention when it comes to understanding your finances.

nYou hear it all the time in regards to borrowing but what is a credit limit?

The Simple Definition

Simply put a credit limit is the maximum amount of money a lender will allow you to borrow in a loan or on a credit card. If you are being lent money the bank or credit card company will almost always put a limit on how much that can be.

How Is It Determined?

A credit limit is something that can fluctuate over time depending on your financial history. But the initial limit set when you apply for a card or a loan is based upon your credit history, credit score and the contents of your credit report. The higher your score and more positive your credit history the higher your limit will generally be - factoring in your yearly income.

If you have little to no credit history you are generally set at a low credit limit at first that can increase as you show you are a responsible borrower. You won't know what your limit will be until after you have completed the credit application process, which can be stressful for some.

Why Does It Change?

Credit limits change based on your credit activity with that card or account. If you show you are making on-time payments consistently then you will likely be eligible for a limit increase, which you can request easily with whatever lender you have a card with.

If you have a drop in income or other financial trouble sometimes that limit may be lowered. Likewise if you don't make on-time payments and start using much of your limit you can be subjected to a limit decrease because you are showing risky behavior for the lender.

How Much Can I Use?

Technically you can spend right up to your limit if you want but that isn't a great idea if you are looking to keep your credit in good standing. If you do go over you will likely be charged an overage fee and even additional penalties.

The rule of thumb when spending is to only use up to 30 percent of your credit limit. This will keep your credit utilization ratio nice and low and reflect positively on your credit score.

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