What is a Credit Limit?
What is a Credit Limit?
This is the maximum amount of money that you can borrow from a lender, like a bank or credit card company, at a given time. Think of it like the maximum amount of groceries you can fit into your shopping cart.
For example, if you have a credit card with a credit limit of $1,000, that means you can spend up to $1,000 on your card. But once you reach that limit, you'll need to start paying off what you owe before you can borrow more money with your card.
Remember, it's a good idea to not use all your available credit. Using too much can actually hurt your credit score. Just because the bank says you can borrow up to $1,000, doesn't mean it's a good idea to borrow that whole amount.
3 things to know about Credit Limits
1. Sets Boundaries: A credit limit sets a boundary on your spending. This is really your lender's way of saying, "This is how much we trust you can repay." It encourages you to manage your money wisely and not spend more than you can afford to pay back.
2. Can Change: Your credit limit isn't set in stone. It can change over time, usually based on your credit behavior. If you consistently make your payments on time and use your credit responsibly, the lender might raise your credit limit. On the other hand, if you miss payments or go over your limit, the lender might lower your credit limit.
3. Impacts Credit Score: The percentage of your credit limit that you're currently using, known as your credit utilization ratio, plays a big role in determining your credit score. A lower credit utilization rate is generally better for your credit score. As a rule of thumb, it's often suggested to keep your utilization below 30% of your total credit limit. 
Have credit cards always had Credit Limits?
Actually, no! When credit cards first came onto the scene in the United States in the 1950s, many of them did not initially have set credit limits. Instead, cardholders were often assessed on a case-by-case basis to determine their buying power.
It was only later, as the credit card system became more sophisticated and companies began to compete for customers, that credit limits were introduced as a way to manage risk. By setting a credit limit, companies could limit the potential loss if a customer were unable to repay their debt. This also provided a way for companies to offer different products to customers based on their creditworthiness.
Today, virtually all credit cards have a set credit limit, which is typically based on the cardholder's credit history, income, and current debt levels. A cardholder's credit limit can be periodically reviewed and adjusted based on these same factors, as well as payment history on the card.
Citations and links
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