The amount of money you can charge to a credit card is called a credit limit. Upon purchasing anything, the sum of purchase is added to the card’s balance, and the difference between a credit limit and current balance defines how much more one can spend using the card.
Explanation:
Credit is a type of trust relationship when one party lends something – usually money or other resources – to another party with an obligation to return these at a later date. The overall amount of resources that one party is willing to lend to another is called a credit limit. As follows from the name, credit cards are credit products, and while there may be different credit card types in use, the notion of credit limit applies equally to all of them.
An example may illustrate what determines the credit card limit, how it relates to balance, and how the system works in general. The bank that issues the card sets the limit in an agreement with the card user, and exceeding it may result in additional fees.
Every time a credit card is used to purchase something, the sum of this purchase is added to the credit card balance, and the difference between it and the limit defines how much more one can spend using this card. At the end of the billing cycle, which is usually one month, the bank issues a statement outlining the cardholder’s spending during the period.
If the cardholder repays the entire balance within the grace period – in this case, the same billing cycle it was incurred – there are no additional fees. If, however, the cardholder fails to repay the balance incurred in full, the credit limit for further billing periods is reduced by the unpaid balance plus fees for each following billing cycle.