A credit limit is the maximum amount of credit that a financial institution, such as a bank or credit card issuer, is willing to extend to a borrower or account holder.
The credit limit is typically determined by the financial institution based on a variety of factors, including the borrower’s creditworthiness, income, and debt-to-income ratio.
A credit limit can apply to various types of credit accounts, such as credit cards, lines of credit, and personal loans. For credit cards, the credit limit is the maximum amount of money that a cardholder can borrow on their credit card account.
For lines of credit and personal loans, the credit limit refers to the maximum amount of money that a borrower can borrow over a certain period.
Credit limits serve as a way for financial institutions to manage their risk and ensure that borrowers do not take on more debt than they can reasonably afford to repay.
By setting a credit limit, financial institutions can help prevent borrowers from overextending themselves financially, which can lead to missed payments, default, and other negative consequences.
