Credit Limit

What is a Credit Limit?

A Credit Limit is the maximum amount of credit that a lender will extend to you, which varies depending on their risk appetite.

A Credit Limit is based on a variety of factors ranging from an individual’s ability to meet payments as they are due, an organisation’s cashflow and ability ultimately to repay the principal sum lent, to the credit standards employed by the lender. A Credit Limit is also in part based on the borrower’s recoverable assets in the event of Default.

Credit limits are most often seen by consumers on Credit Cards, as they dictate how much you can spend each month. In that instance, they are treated much like an Overdraft Limit. 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 credit limit imposed in most cases is fixed for the life of the product, except in the case of credit cards that may be raised or lowered at the card issuer’s discretion.


Q: Can a credit limit be reduced?

A: Yes, most card providers will retain the right to reduce your credit limit as a way of reducing their risk. This can happen as a result of missed payments or even because you rarely come close to reaching your credit limit.

If this happens it may affect your Creditworthiness as it will change your credit utilisation ratio.

Q: How does it work?

A: The credit limit you are initially offered is often a reflection of your credit rating; the better your repayment history, the more likely the lender will be to offer higher amounts of credit.

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