Credit Score vs Credit Limit – Difference and Comparison

What is a Credit Score?

A credit score is a 3-digit numeral that lenders use to assess a consumer’s creditworthiness and ability to manage credit. It is based on the consumer’s credit report and is calculated by a credit bureau. As a consumer, having a good credit score is essential because it can affect a person’s ability to obtain loans, credit cards, and other forms of credit.

The FICO score is the multiple generally used credit scoring model, which ranges from 300 to 850. A higher score indicates to lenders that consumers can manage their credit responsibly. Factors such as payment history, amount of debt, and length of credit history used are all considered when calculating a FICO score.

Improving a credit score takes time and effort. It requires consumers to be mindful of spending and make payments on time. A credit score is vital for lenders and landlords when assessing a consumer’s creditworthiness. It is essential for consumers to understand their credit score and to take steps to improve it if needed. Improving a credit score takes time and effort, but it is essential to maintaining a healthy financial future.

What is a Credit Limit?

The credit limit is an essential concept in the world of personal finance. It is the maximum amount of credit that a lender will extend to a borrower. A borrower’s credit limit is based on their creditworthiness, determined by their credit score, income, debt-to-income ratio, and other factors.

Credit limits are necessary because they help protect lenders from overextending credit to borrowers. Credit limits can vary significantly from one person to the next. Generally speaking, consumers with excellent credit scores will have higher credit limits than those with lower scores because lenders view those with higher scores as having less risk of being unable to repay their debt.

Additionally, those with higher credit limits may be offered more attractive loan terms and interest rates. Having a credit limit can also be beneficial for borrowers. Access to credit can make it easier to make large purchases or cover unexpected expenses.

Difference Between Credit Score and Credit Limit

  • Credit Score is calculated using different factors such as payment history, amount of debt, length of credit history, and available credit. In contrast, the lender sets a credit limit based on an individual’s creditworthiness.
  • A credit score goes from 300 to 850, while a Credit Limit is the maximum amount of credit that can be extended to an individual.
  • Credit Score indicates how well an individual manages their debt, while Credit Limit is the maximum amount of credit that can be extended to an individual. 
  • Lenders use Credit Scores to determine an individual’s creditworthiness, while Credit Limit is the maximum amount of money an individual can borrow. 
  • Credit Score determines an individual’s risk to the lender, while Credit Limit is the maximum amount of money that can be loaned to an individual.

Comparison Between Credit Score and Credit Limit

Parameters of ComparisonCredit ScoreCredit Limit
MeaningIt is a numerical representation of an individual’s creditworthiness.The maximum amount of credit can be extended to an individual.
Bounded byIt is used to bind an individual’s creditworthiness.It is a predetermined amount of money.
Determined asIt is used to determine loan eligibility.It is used to determine the amount of money that a borrower can borrow.
Based onIt is based on an individual’s payment history.It is based on an individual’s creditworthiness.
CalculationsIt is calculated based on the borrower’s past payment behavior.It is determined by the lender’s evaluation of the borrower’s creditworthiness.

References

  1. Anatomy of the credit score – ScienceDirect
  2. https://www.nccr-finrisk.uzh.ch/media/pdf/wp/WP072_6.pdf