What does the term "credit limit" refer to?

The term "credit limit" specifically refers to the maximum amount of credit that a financial institution will extend to a borrower on a particular credit account. This limit is set by the lender based on the borrower's creditworthiness, income, and overall financial profile. It determines how much the borrower can charge to a credit card or borrow through a line of credit without incurring penalties.

For instance, if you have a credit limit of $5,000 on your credit card, you cannot charge more than that amount without facing potential fees or a denial of the transaction. This limit helps manage risk for lenders by ensuring that borrowers do not take on more debt than they can handle.

Understanding the credit limit is crucial for managing finances effectively, as it influences spending habits and repayment strategies.