Meaning of the term credit limit

The credit limit is a limit within which the holder of an overdraft, an on-demand loan or a credit card is allowed to make payments, execute transfers or withdraw cash. How high the credit limit is in any individual case cannot be answered universally.

This depends on various factors, with personal creditworthiness and income level playing a particularly important role. If all requirements are met, there is nothing to prevent a customer from being granted both an overdraft and an on-demand loan and/or a credit card, which they can then use as often as they like and, if necessary, simultaneously.

Credit limit with an overdraft

The most important feature of an overdraft is the fact that it is always linked to a current account. Its setup requires, on the one hand, a regular income and, on the other hand, a good relationship of trust with one's bank. For this reason, an overdraft is usually not granted immediately after opening a current account, but only after some time.

Its amount is primarily based on the level of monthly income and will typically be two to three times that amount. However, there are various exceptions that can justify a significantly higher or significantly lower overdraft.

Once set up, the credit limit on the current account can be used in whole or in part at any time. Repayment works in a similar way. Regular smaller monthly payments are just as conceivable here as larger one-off amounts.

An overdraft with a credit limit is fundamentally always a revolving credit. This specifically means that any sum with which the credit account has been balanced again becomes available once more. Those who want to use the credit limit on a current account can do so in an uncomplicated manner. This requires neither a separate application nor prior notification.

Interest on overdrafts

Unlike an installment loan, which must be repaid in fixed monthly installments, an overdraft generally incurs interest charges only when it is actually used. As long as the credit limit is merely provided and not utilized, no interest must be paid. It is also important to know that interest on a credit limit is calculated not only by the day but even to the minute or second. For this reason, it is worthwhile to repay outstanding amounts as early as possible and not to wait unnecessarily long.

If roughly equal monthly credits are posted to the current account, the credit limit will be granted for an indefinite period and will neither be reduced nor significantly increased. Only when the customer is permanently overdrawn and can no longer balance the account on their own will the bank take appropriate measures and reduce the credit limit or convert the overdraft into an installment loan.

Things become particularly difficult when regular salary payments stop and, for example, unemployment threatens. Even if unemployment benefits are paid very regularly, they are not compatible with a credit limit on the current account. A bank could only make an exception if the customer can present a well-earning spouse or a solvent guarantor who commits to cover any payment arrears on the current account if necessary.

Unemployment benefits, regardless of the amount, are always a social benefit that cannot be seized. This is also the reason why it is not possible to secure the credit limit on the current account with unemployment benefits.

Credit limit with an on-demand loan

There are various branch or direct banks that can set up an on-demand loan for their customers if required. Such a loan is ideal for bridging temporary financial bottlenecks or fulfilling larger consumer wishes.

Similar to an overdraft, the credit limit for an on-demand loan is set individually. The monthly income and the degree of personal creditworthiness are decisive here. A very important advantage of an on-demand loan is that the nominal interest rates are significantly lower than those of an overdraft and roughly comparable to the nominal rates of an installment loan. However, the customer is much more flexible with an on-demand loan and can use the established credit limit at any time, repay it in whole or in part and use it again later.

Many banks require a certain minimum monthly payment to be made to repay outstanding amounts on the account. Whether and in what amount this minimum payment must be made is determined individually by the banks. Therefore, no universal statement can be made here.

Credit limit with a credit card

Credit cards have become a popular means of payment in recent years and are indispensable in many areas of the economy. For example, it is often not possible, or only under difficult conditions, to reserve a hotel room or book a rental car without a credit card. In the USA or the UK it is even virtually impossible to participate in normal economic life without a credit card.

As great as the demand is, so too is the number of possible credit card providers. To obtain a credit limit on these cards, essentially the same requirements must be met as for a credit limit on an overdraft or an on-demand loan.

A major advantage of a credit card is that the customer can pay cashlessly immediately and the corresponding amount is only debited from their account a few weeks later. In this way, the credit card can also be used as an alternative to an overdraft.

Credit limit with a prepaid credit card

Those who are unable to obtain a credit card with a credit limit do not have to forgo a credit card entirely. As more and more banks have recognized the steadily increasing demand for credit cards, they have recently begun offering so-called prepaid credit cards, which are available to everyone.

High private indebtedness or receiving social benefits (Hartz IV) are also not obstacles to issuing a prepaid credit card, which is available as a VISA or MasterCard and is generally accepted wherever other credit cards can be used for cashless payments. The only difference from a conventional credit card is that the customer does not receive a credit limit. The card can only be used on a prepaid balance basis. The desired amount must be deposited and credited to the credit card account before the card is used.