A credit limit is the maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit (sometimes called a credit line, line of credit, or a tradeline). For example, it is the most that a credit card company will allow a card holder to take out at once on a card.
This limit is based on a variety of factors ranging from an individual's ability to make interest payments, an organization'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.
Credit limits are most often seen by consumers in the form of revolving lines of credit known as credit cards. They are also used in the extension of open account credit terms from business to business. Other examples include home equity lines of credit, residential 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 each application received by the card holder or offer by the card issuer.
Many creditors will charge an over-the-limit fee as a penalty for anyone who exceeds the available line of credit, should the creditor allow this to occur. The over-the-limit fee is considered to be credit card debt and is an obligation of the consumer to pay just like all other parts of the balance.
A line of credit that has exceeded its limit is said to be maxed out. While the line of credit is maxed out, it 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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