Credit Cards 101: What Is a Credit Limit?

Credit limit – the term is a bit confusing, but with the help of this guide, you’ll be taken through what credit limits entail and how you can manage them.

Ever since their inception, credit cards have quickly risen to some of the most dependable aspects of human life. That’s why, in today’s world, they’re being considered as the cornerstone of the American economy. It is practically impossible to find anyone who doesn’t use credit cards in the US today. 

And, with their vast amount of usage, there is still a lot that most users don’t understand about credit cards. One of the things that most don’t understand in regards to their credit card is the concept of the credit limit. Let’s learn more about it here.

What Is a Credit Limit?

Credit Limit

Credit limit, in essence, means 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.

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 card, 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.

Deeper Understanding

Covering the basics of credit cards was quite the natural part; now let’s take a more in-depth look at what more you should know about credit limits. 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; they check on a lot more. So, what should you not forget to put down when applying for a credit card?

  • Personal financial statement.
  • Tax return for 2-3 years.
  • Only use your property as bargaining tools; don’t offer them first.
  • Negotiate interest rate.
  • 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 $400 and you spend $200. Your available credit is $200.

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

Conclusion

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

That ensures that you can more quickly grow your limit over time than someone who doesn’t understand their limitations.