Credit Score and Credit Limit are two terms that are used often in the banking sector. Credit Score is a numerical score given to a person according to his/her credits in the respective bank. A credit limit is the maximum amount of money that is credited to a person in debt by keeping his line of credit in mind. Both these terms are used to extend credits in terms of loans to the customers.
Credit Score vs Credit Limit
The main difference between Credit Score and Credit Limit is that credit score is a numerical score given to you according to your assets and other earnings whereas credit limit is a factor that limits the amount of money you can borrow using your credit score.
Credit Score is a parameter to understand the creditworthiness of a customer. This score gives an idea to the lenders/credit card companies about the secureness they can have if they lend the customer cash. Different credit score levels are maintained to qualify the stakes of claiming different loans.
A credit limit is a parameter to understand the capability of a credit receiver. If a certain amount is lent to a customer, the resources available with him are checked beforehand so that the lender will not have to face a loss in the future. A line of credit is maintained which if crossed, no more credits can be given to the debtor.
Comparison Table Between Credit Score and Credit Limit (in Tabular Form)
| Parameter of Comparison | Credit Score | Credit Limit |
|---|---|---|
| Definition | Credit Score is a numerical score given according to the wealth possessed by you | Credit Limit is a stake to provide a loan according to the security a person possesses. |
| Impact | Credit scores play a major role in altering the credit limit. If the credit limit gets low, credit scores go down. | Credit limits can get affected by credit scores. If credit scores are high, credit limits can raise. |
| Debit alterations | When an account gets debited with personal earnings, the credit score is not affected. | When an account is debited with its own money, no changes happen to the credit limit. |
| Zero alterations | When the credit score is zero, the creditors cannot identify your potential to repay. So you should have a history of repayment for them to analyze. | When the credit limit is zero, no more credits can be given to the account, and hence no repayment is necessary for getting more credits. |
| Fixed Securities | A credit score is not affected by assets, but while you purchase a credit card, you may need them. | Assets are backbones to credit limits and can improve the credit you get from a lender. |
What is Credit Score?
Credit Score in India is a system for ranking the customers according to the creditworthiness of their accounts. The ranking system in India is normally between 300-900 points. A person is awarded these points according to the credit history he has. A credit report is a key factor that determines the credit score of an individual.
The credit score of a person can determine the financial condition of this individual. It helps the lenders to know more about the person and they can decide the amount of loan that can be allotted to the person. Also, the get to know the revenue they can get back by lending them money, The credit score is utilized wherever the credit system is applicable.
Normally people use credit cards for mobile transactions. If you have a credit score below 300, your chances of getting a loan are low and if you have above 900 you are likely to get the applied loan.
What is Credit Limit?
The term Credit limit means the maximum amount of money that can be lent to a person according to the line of credit he maintains. When no more credit can be given to this person, the credit limit of him/her has exceeded and for getting more credits, he/she should repay some of the previous debts.
The credit limit of a person is based on many factors such as income, security, and credit history. These are the proofs that show the amount of money a person can repay with what he/she earns. If the credit limit gets maxed out, sometimes the lender allows getting credits 1-2 times.
This is purely for non-electronic relations and for transactions from credit cards this opportunity is not provided. The credit limit of individuals can be set up by lenders. According to their evaluation, lenders classify them into high-risk borrowers and low-risk borrowers. They give high-risk borrowers low credit due to the risk involved and vice-versa.
Main Differences Between Credit Score and Credit Limit
- A credit score is a numerical rating given to an individual according to his credit history and credit limit is the maximum credit that can be provided to a person according to his credit history.
- If the credit score is zero, the lender cannot understand your credit history. If the credit limit is zero, there is no more credit allotted to you.
- Fixed securities and assets can only help you get a credit card and don’t play many roles in altering credit scores. But if you have assets, your credit limit can get altered.
- When credit scores are maximum that is greater than 900, the person is likely to get a loan. If the credit limit has maxed out, it means that no more credit can be allotted to a person.
- When credit score changes according to the external factors, the credit limit can be altered by the individual by altering the money spent.
Conclusion
Credit scores are the numerical scores given to a person according to his credit history and credit limit is the maximum credit a person can acquire from his credit history.
Both these terms give the lenders and borrowers and idea about the money they can invest in a particular task. These are the stakes through which a person can be financially judged. They are calculated by the institution that has the power to allot credit.
References
- https://www-2.rotman.utoronto.ca/facbios/file/creditlimit.pdf
- https://eprints.soton.ac.uk/71324/01/CORMSIS-09-09.pdf