Credit Limit

Posted in Finance, Accounting and Economics Terms, Total Reads: 346
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Definition: Credit Limit

It is the maximum amount of money that lender would be willing to lend to the borrower. This limit is based on the premise that the maximum that lender can lend is based on the repaying capability and willingness of the borrower. Thus, both the ability to repay and willingness to repay are important. At the lending side, the risk capacity of the lender is important i.e. how much rick is the lender willing to take on the borrower and this is determined by the risk aversion factor of the lender.


When the credit extended is fully exhausted, the situation is said to be maxed out. In this scenario, the lender might not lend any additional money to the borrower until all some or all the money is repaid by the borrower to the lender. Each borrower has a credit score which specifies the amount of credit that the person can take. It is basically a record of a person’s financial history.


Making payments consistently on time improves credit score, so does the income level, age and education level of the person.

 

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