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Credit limit is the maximum amount of money that a
bank or other money lender will lend to a money
borrower, or the maximum amount of credit that a
credit card company will allow a card holder
to borrow on a single card.
A person's
credit limit is determined by their credit
risk. Credit risk is a very important factor when
applying for credit, as it can affect the amount
of credit that you receive and the rates of
interest that you will pay. A person's credit risk
depends on a range of factors, such as their
employment stability, level of income, level of
debt,
credit history, and so on. By reviewing these
factors, money lenders can determine how much risk
they will be exposed to if they lend the person
money. The level of risk will affect the amount of
credit that they may be extended and it will also
affect the rates of interest that they will pay.
People who have one or more significant assets,
little debt, and a good credit history will
generally be loaned more money (that is, have a
higher credit limit) and at lower rates than
people with no assets, high debt, and/or a poor
credit history.
Some lenders will allow a borrower to exceed their
credit limit, but this will only be under very
strict conditions. For example, it may only be
allowed for a very limited period of time. And,
the credit limit may only be allowed to be
exceeded by a very limited amount. In addition,
the borrower may also incur fees, fines, or other
penalties for exceeding their credit limit.
Credit limits provide some important advantages.
For example, they serve to protect the borrower
from getting in over their heads and borrowing too
much money, and they also protect the lender from
being over exposed to borrower's getting too far
into debt.
Credit limits also cause some disadvantages. For
example, they may severely restrict the borrowing
capacity of the borrower, reducing the value of
items that they can purchase. As a result,
credit limits can also reduce the potential
income received by the lender because borrowers
are limited in what they can borrow.
Having a high credit limit can, in some
circumstances, adversely affect your overall
credit rating. Since you already have the
potential to borrow a larger sum of money it would
put a new potential lender in more risk if you
decided to do so. In addition, a lower credit
limit can also adversely affect your overall
credit rating, especially if you use a greater
percentage of your available credit. This is
because it makes it appear that your are using up
almost all the credit you have making you appear
to have financial difficulties or problems
managing your money.
So, it is all a balancing act - getting the right
credit limit for each borrower without exposing
either the lender or the borrower to unacceptable
levels of risk. In addition, it is also important
for the borrower the get an appropriate credit
limit, otherwise their credit risk may be
adversely affected.
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