What is a Credit Limit?

A credit limit is the maximum amount that a creditor will extend or allow you to borrow. The creditor may be a bank, a credit card company, an automotive company, or another type of lender.

Limits are influenced by a variety of factors including your credit history and your credit rating. Credit history or credit report shows your payment and borrowing patterns. Credit rating or credit score shows a subjective assessment of your credit worthiness based on your credit history and your assets and/or liabilities. These factors are a part of the evaluation process used by creditors in setting credit limits.

Credit limits should be carefully monitored to ensure that you do not exceed your designated amount. If you realize that you need to increase your limit, contact your creditor immediately rather than spending beyond it. To ensure that you do not exceed your limit, you may find it helpful to keep a pocket notebook with you to write down your purchases. It is possible to lose track of spending and inadvertently overspend. Exceeding your credit limit with a creditor puts negative information on your credit report.

Consumers with an excellent credit rating and excellent credit history are often rewarded with higher spending limits. Having a high credit limit but not reaching or exceeding that limit is often viewed favorably among creditors. A consumer who has the ability to spend a large amount but opts not to do it is often seen as a responsible borrower.

Many creditors often use credit limits as a means of evaluating new borrowers. New borrowers often receive lower spending limits. Once the new borrower has proved themselves credit worthy, by making scheduled payments and by not overspending, their limits are often increased.

Credit limits may also rise and fall based on your spending patterns. If you have a high limit and constantly spend without making more than the minimum payments on your balances, your creditor may opt to lower your limit. Similarly, if you are a consumer who has a high credit limit that is never reached, and you make significant payments on your credit balance, your credit limit may be increased.

Limitations on credit are there for a reason. Being careful with your credit limit is vital and will have a direct impact on your future financial status. Your ability to borrow money for future purchases such as a home, a car, and other major purchases are directly influenced by how you handle your credit limit. Limit yourself when purchasing items on credit and you will have more possibilities in the future.