A credit limit is the maximum amount a person is allowed to borrow from a financial institution or other lender. Credit limit is also sometimes called credit line.
People are usually familiar with the term credit limit due to credit cards, since credit cards are one of the most common forms of easily available credit lines nowadays.
The credit limit extended by the financial institution depends of a variety of factors, including the borrower’s credit history and credit rating. A person with a good credit history and score usually gets larger credit limit since the lenders feel like they can trust such a person.
Another important factor considered by lenders is the person’s ability to pay back the loan, reflected by a person’s income or salary. Aside from the salary, a person’s ability to pay is affected by any current liabilities such as other outstanding loans. The higher a person’s disposable income is, the larger the credit limit usually is.
However, as time goes by, the payment record of the borrower in that specific lending institution begins to outweigh the other factors. Someone with a good payment record can then expect to be approved when he/she applies for a higher credit limit.
