UK Accounting Glossary
A credit limit is the explicit borrowing ceiling set by a lender for a particular customer. The credit facility having a credit limit can take many forms, both secured and unsecured. The line of credit, letter of credit, and credit card all have a credit limit. An example of secured debt would be the home equity line of credit, or HELOC, where the credit limit decision would take into account the amount of home equity accumulated. On the other hand, the credit limit on a credit card, which is unsecured, would be based entirely upon creditworthiness. The creditor can raise or low the credit limit at its sole discretion. One exception relates to Regulation U, a Federal Reserve rule that limits the credit limit a customer can be offered to buy securities on margin.
When you first receive your credit card, your card issuer will have set you a credit limit. This is the maximum amount you are allowed to spend on the credit card. Remember, this is a limit, not a target!
The credit limit is determined by the information supplied on your application form and its own credit scoring process. The card issuer will, as a matter of course, have checked out your credit record with a credit reference agency.
If you attempt to go over your credit limit you could find your credit card is refused by the retailer. If the transaction is allowed you may be faced with financial penalties from your card issuer.
If you think you are likely to go over your credit limit, for whatever reason, you may contact your card issuer and request a higher limit, which it may or may not grant.
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This glossary post was last updated: 4th February 2020.