The maximum amount of charges that may be charged to an account. For example, if you have a credit limit of $5,000, your total charges cannot exceed this amount.
When applying for a credit card, the lender or bank decides what that maximum amount is that you can borrow. This is known as a credit limit.
A lender, usually a bank, approves you for a credit limit, which is the most the bank will let you borrow. The bank decides what that limit will be by examining your income, assets, and credit history. Your credit history includes a variety of financial information about you. For example, it shows all of your open and closed accounts as well as the start dates for those accounts. It also shows your credit limits, loan amounts, and outstanding balances. The credit history keeps record of your payments and payment patterns, too. By using your income, assets, and credit history, the lender knows how much you can afford in debt. The lender then issues you a credit card.
Once you have the credit card, you are able to use it to borrow up to your limit. For example, if your credit card has a $5,000 credit limit, that is how much debt you are able to put on that card, including any financial charges and interest.
However, your interest can actually exceed the credit limit, so don’t think the amount you owe in interest stops at the credit limit. As you use the credit card to make purchases, that amount is subtracted from the credit limit. Once the charges on the credit card reach $5,000, you cannot use that card anymore until you repay some of the debt.
As you do make the payments, however, that money is again available for you to borrow. Let’s say that you have maxed out your $5,000 limit. You then make a payment of $500, bringing the debt on the credit card to $4,500. You can start using the credit card again to make purchases up to $500, which brings you back up to your credit limit. Since it is a revolving debt, there is never any end date to the loan. When you reach your credit limit, you simply make payments to pay down the debt. As you pay down the balance, that money is again available to you to borrow.
Be careful about borrowing up to your credit limit. Make sure that you do not put so much on your credit cards that you have trouble paying them off and create a lot of financial stress in your life. Be disciplined in their use and faithful in making your payments.