What is a credit limit?

A credit limit is defined as the maximum amount that a borrower is allowed to charge on a credit card. This limit is set by the credit card issuer based on various factors, including the borrower’s creditworthiness, income, and overall credit history. Understanding the credit limit is crucial for managing credit responsibly; exceeding this limit can lead to fees or declined transactions.

This option accurately captures the essence of what a credit limit entails, emphasizing the crucial aspect of constrained spending based on pre-determined criteria. It is an important concept in personal finance, as it guides users on how much they can safely spend and helps in building a good credit history by staying within the limit.