What is a Credit Limit?

While Wall Street and the world of high finance are filled with complicated terms that most people have never even heard of, let alone fully understand, one term that just about everyone can grasp is a “credit limit.” When it comes to the buying and selling of securities, a credit limit is just what it sounds like: the maximum amount of money a person can borrow from a lender.

How Credit Works

Most Americans deal with credit every day, usually in the form of a credit card. If you apply for a credit card, or are offered one, it will come with a credit limit determined by the lender. So, the day you get your new credit card with the $10,000 limit, you can run right out and charge $10,000 worth of whatever you’d like. Once the bill hits $10,000 you’ve reached your limit. Once you’ve paid off all or part of the $10,000 (plus interest, of course) you can then go out and buy as much as your balance dictates. Credit can also be built by how much of your revolving credit is paid off each month.

What Determines Credit Limits?

In terms of securities, a credit limit offered by a lender works the same way. If you’re a buyer with a strong credit history – that is to say, you make all the payments on whatever debt you have promptly, and in full – you will be extended credit when it comes to purchasing securities. This can be a really great way to make money. If you buy 20 shares on credit and then they go up in value, you can sell them at the new price, pay back the lender for what you paid for them, and then enjoy the profits.

If you’re thinking about buying securities and want to know more about credit limits, or simply have questions about credit limits in general, make a point of discussing the topic in as much detail as you’d like with a financial advisor or expert.