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Credit Limit
Definition
A credit limit is the maximum amount a lender allows you to borrow on a credit card or credit line.
Explanation
Credit limits are set by lenders based on your creditworthiness, income, and existing debt. A higher credit limit can improve your credit utilization ratio (keeping usage below 30% of the limit is recommended). Requesting a credit limit increase can sometimes result in a hard inquiry on your credit report.
Maxing out your credit limit hurts your credit score and may trigger fees or rate increases. Responsible use involves keeping balances well below the limit.
Example
A credit card with a $10,000 limit and a $2,500 balance has 25% credit utilization. Keeping it below $3,000 (30%) is ideal for your credit score.