Credit Limit Definition

Virtually all credit accounts have a credit limit, or a maximum amount of credit which will be extended. For example, when your twenty-something daughter applies for—and actually gets—a Visa card, it will hopefully have a credit limit of something like $800. This means she’ll be able to buy a pair of designer jeans, a top to go with it, and a dozen new ring tones before her line of credit has been exhausted; when she tries to charge up those great shoes, the charge won’t go through. She’ll come home, show you her brand new card, and then complain that it’s already broken. If an account exceeds the credit limit for any reason, a monthly over-limit fee will usually be assessed. The following month, interest will be charged on the over-limit fee, all of which makes it very hard to get the card paid down fast enough to avoid next month’s over-limit fee. It’s always best to plan ahead so you can pay off the entire balance before the end of every billing cycle. If this advice sounds just like your dad—it’s because your dad was right.