What is meant by the term 'credit limit'?

The term 'credit limit' refers to the maximum amount of credit that a lender is willing to extend to a borrower. This limit is determined by various factors, including the borrower’s creditworthiness, income, and credit history. It represents the upper threshold of borrowing capacity on a credit account, meaning that the borrower can charge purchases or take cash advances only up to that specified limit.

Understanding this concept is essential in managing personal finances. If a borrower reaches their credit limit, they cannot make further charges until they pay down their balance, which can lead to potential financial strain or negative impacts on their credit score. Therefore, being aware of and respecting one’s credit limit is integral to maintaining good financial health.

In contrast, the other choices relate to different financial concepts. The minimum amount a borrower must repay each month pertains to repayment terms rather than a limit on borrowing. The overall financial health of a borrower is a broader assessment that involves more than just the credit limit, incorporating income, debt-to-income ratio, and overall financial status. The interest rate charged on borrowed funds is a separate consideration involving the cost of borrowing, not the credit amount itself.