How It Works
After a financial institution has approved an applicant's request for a credit card or another type of revolving credit, the lender will decide on the maximum amount of credit it's willing to extend to that person; this maximum amount is known as the credit limit.
A credit limit is based on several factors that influence a borrower's ability to repay. Generally, the applicant's credit score, income and job stability are the main factors considered in determining an appropriate credit limit.
For example, let's assume you go to Bank ABC and apply for a credit card. After being approved, Bank ABC puts a credit limit of $10,000 on your new credit card after reviewing your credit score, income level and the length of time you've stayed at your current job. This means that you may potentially charge up to a $10,000 on the card.