Credit Cards 101: What Is A Credit Limit?

Credit cards, with their vast amount of usage, can still be a bit of a financial mystery and there can be a lot that users don’t understand about using them. One of the things that many people might not fully understand is the concept of the credit limit.

Your credit limit is determined by your issuer and is usually based on your credit score. Using your card up to your limit, or beyond, can be risky, while not using your card limit enough can also have an impact on your financial health.

ADVERTISEMENT

Learn more about what a credit card limit is in this article.

What Is a Credit Limit?

Credit Limit

A credit limit is the amount of credit that a financial institution offers you as their client. When it comes to credit cards, the issuer offers you credit on the credit card or a line of credit.

ADVERTISEMENT

The limit is extended or offered based on the information you gave on your application process. The credit limit is based on your credit score.

How It Works

Whether it’s through your credit card or line of credit, a credit limit pretty much works the same. You’re allowed to spend amounts that are within your set limit. Note that you can overspend at some points, but it comes with penalties.

Just remember that the fines you incur when you exceed your spend over your limit come on top of your annual fees. If you haven’t reached the limit of the card, you can generally continue using the card until you reach the credit limit.

ADVERTISEMENT

Deeper Understanding

Your limit is generally decided by the information that you give the lender. So, what exactly do they examine before they give you a line of credit?

  • Personal income
  • Credit score
  • Repayment history of previous loans

These are just three of the basics but they check on a lot more. When applying for a credit card, you’ll have to provide the following in order for them to understand what credit limit is best for you.

  • Personal financial statement
  • Tax return for 2 to 3 years

Being organized will prove that you’re less a risk than someone who comes in less prepared

Having a high credit limit is based on the institution seeing that you’re a low-risk borrower. But, watch out, it can bring about overspending.

Credit Limit vs. Available Credit

One of the most challenging issues when it comes to a credit card limit is differentiating between the credit limit and available credit. Available credit is the credit you remain with after spending a portion of your credit. For example, if you have a ‘credit limit’ of $500 and you spend $200. Your available credit is $300.

That means you can only spend $300 after you spent your first $200. If you pay $100, your available credit bounces to $400. Your limit remains $500 all the same.

Conclusion

Understanding your credit limit ensures that you don’t incur fines due to over-expenditure. It’s not only about going over budget when it comes to credit limits, but it also makes you aware of your financial state.