Credit limit
A credit limit is the maximum amount a borrower may draw on a credit card or credit line. Lenders assess what the borrower can afford, with income and risk band informing the amount. The limit is often the lower of what affordability allows and the cap for that band.
Example
For illustration, suppose affordability supports a $3,000 limit and the risk-band cap is $2,000. The limit would be $2,000. At an assumed 4% minimum payment, that limit implies an $80 monthly payment.
How lenders set an initial credit limit
A lender may use an income multiple to set a preliminary ceiling. For illustration, if a policy uses twice monthly income, monthly income of $4,000 gives an $8,000 ceiling before affordability is checked.
The affordability assessment considers whether the assumed minimum payment fits the borrower’s capacity. The lender can then apply the cap for the risk band, so the initial limit may be lower than the income-based ceiling.
How credit limits change over time
An increase is often offered after six to twelve months of on-time payment. That timing is not a regulatory threshold. If risk rises, a lender may lower the limit.
Utilisation connects the limit to exposure. When a borrower draws more of the line, more of the lender’s credit is exposed if the borrower defaults.
Questions we get asked
How does the minimum payment affect an affordability assessment?
For a revolving line, an affordability assessment may assume a minimum monthly payment set as a percentage of the limit. For illustration, a 5% assumption on a $1,000 limit gives a $50 monthly payment.
Is a credit limit the same as the amount owed?
No. The limit is the maximum available to draw, whereas the amount owed depends on how much has actually been drawn and not repaid.
What happens if a transaction would take me over my credit limit?
The outcome depends on the lender’s terms and how it handles a transaction that would exceed the available limit. Check the card or credit-line agreement for the applicable treatment.
Decisimo’s free credit-limit calculator calculates a limit for each risk band from affordability and risk, and shows which bands lose money on today’s limits.
