Credit limit: Difference between revisions
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A '''credit limit''' is the maximum amount of [[Credit (finance)|credit]] that a [[bank]] or other [[lender]] will extend to a [[debtor]], or the maximum that a [[credit card]] company will allow a [[card holder]] to borrow at any given point. |
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A '''credit limit''' is the maximum amount of [[Credit (finance)|credit]] that a [[financial institution]] or other [[lender]] extends to a [[debtor]] on a particular [[credit card]] or [[line of credit]]. Lenders generally set limits based on specific information about credit-seeking applicants, including income and employment status. Credit limits play an influential role on a consumers' [[credit scores]] and their eligibility to obtain future credit <ref>{{Cite web|title=What Is a Credit Limit? How It's Determined and How to Increase It|url=https://www.investopedia.com/terms/c/credit_limit.asp|access-date=2024-07-05|website=Investopedia|language=en}}</ref> |
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This limit is determined by various factors, including an individual's ability to make [[Interest|interest payments]], an organization's [[Cash flow|cashflow]] or ability to repay the credit card debt. These factors are often summarized into a [[credit score]], which institutions use to determine credit eligibility.<ref>{{Cite book |last1=Associated Credit Bureaus |url=https://catalog.hathitrust.org/Record/102599301 |title=Building a better credit record: how to understand your credit history, your credit report, and deal with credit problems |last2=United States |date=1996 |publisher=The Commission |location=Washington, D.C.}}</ref> It is important to understand that credit limits could affect 20% to 30% of a clients credit score based on a '''credit utilization ratio''' - Percentage of [[revolving credit]] Debt to Revolving credit available. Credit utilization ratios exceeding 30% are where negative effects on credit scores become more pronounced.<ref>{{Cite web|title=What Is a Credit Utilization Rate?|url=https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/|access-date=2024-07-05|website=Experian|date=5 November 2023 |language=en}}</ref> Credit limit calculation is done to ensure that total [[Accounts receivable|receivable]] exposure is consistent with the financial capabilities of the client and so a credit limit is set for each buyer. If the credit limit is lower than the theoretical credit limit, it is necessary to reduce the outstanding by negotiating better payment terms or by getting payment guarantees. |
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This limit is based on a variety of factors ranging from an individual's ability to make interest payments, an organisation's cashflow and/or ability to repay the principal, to the credit standards employed by the lender. A credit limit is also based on the borrower's recoverable assets in the event of default. |
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A [[line of credit]] that has reached or exceeded its limit is considered '''maxed out'''. When maxed out, the [[line of credit]] cannot be used for any further activity unless the [[consumer]] pays off at least some of the debt to enable it to fall below the limit, the [[creditor]] agrees to extend the limit, or the [[creditor]] allows one or more additional purchases with the charging of an over-the-limit fee. |
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Credit limits are most often seen by consumers in the form of revolving lines of credit known as credit cards. Other examples include residental mortgages/owner-occupier home loans with redraw facilities, a commercial line of credit or a Bank guarantee. The limit imposed in most cases is fixed for the life of the product, except in the case of credit cards that may be raised upon application by the card holder or offer by the card issuer. |
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==References== |
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Latest revision as of 11:05, 5 August 2024
 | This article needs additional citations for verification. (December 2021) |
A credit limit is the maximum amount of credit that a financial institution or other lender extends to a debtor on a particular credit card or line of credit. Lenders generally set limits based on specific information about credit-seeking applicants, including income and employment status. Credit limits play an influential role on a consumers' credit scores and their eligibility to obtain future credit [1]
This limit is determined by various factors, including an individual's ability to make interest payments, an organization's cashflow or ability to repay the credit card debt. These factors are often summarized into a credit score, which institutions use to determine credit eligibility.[2] It is important to understand that credit limits could affect 20% to 30% of a clients credit score based on a credit utilization ratio - Percentage of revolving credit Debt to Revolving credit available. Credit utilization ratios exceeding 30% are where negative effects on credit scores become more pronounced.[3] Credit limit calculation is done to ensure that total receivable exposure is consistent with the financial capabilities of the client and so a credit limit is set for each buyer. If the credit limit is lower than the theoretical credit limit, it is necessary to reduce the outstanding by negotiating better payment terms or by getting payment guarantees.
A line of credit that has reached or exceeded its limit is considered maxed out. When maxed out, the line of credit cannot be used for any further activity unless the consumer pays off at least some of the debt to enable it to fall below the limit, the creditor agrees to extend the limit, or the creditor allows one or more additional purchases with the charging of an over-the-limit fee.
References
[edit]- ^ "What Is a Credit Limit? How It's Determined and How to Increase It". Investopedia. Retrieved 2024-07-05.
- ^ Associated Credit Bureaus; United States (1996). Building a better credit record: how to understand your credit history, your credit report, and deal with credit problems. Washington, D.C.: The Commission.
- ^ "What Is a Credit Utilization Rate?". Experian. 5 November 2023. Retrieved 2024-07-05.