What is Floor Limit
A floor limit is the dollar amount over which a creditor requires additional authorization before credit can be extended. The term generally references purchases made by credit cards in retail locations.
BREAKING DOWN Floor Limit
The floor limit is a predetermined amount which requires additional authorization to be obtained before an item can be charged to a store account or credit card. The term dates back to when credit card transactions were fulfilled manually. Prior to the technology used today, credit cards were charged by physically copying the credit card with carbon paper and a handheld machine or verified by phone.
The floor limit provided additional protection for the consumer to make sure that they were not going over their limit on a credit card, and for a creditor by verifying that the customer had the necessary credit available to complete their transaction. The predetermined amount varied between creditors and account holders, but for an example, a grocery store with a store credit line may have required pre-authorization on all purchases over $500, making $500 the floor limit.
What is a Creditor
Creditors are any banks or institutions that extend credit to people based on the promise that they will repay the loan. These extensions of credit can vary from loans to credit lines, but the creditor is the entity in the transaction that is issuing the funds. The promise that is issued by the debtor can be in the form of a written promissory note or contract all the way to an informal handshake, depending on the creditor.
Creditors can also be individuals who have made personal loans to friends and family. If a mother lends her son $15,000 to buy a new car, she becomes his creditor. The person receiving the loan, in this case the son, is known as the debtor.
Creditors generally charge interest on the funds that they are providing. In the case of credit cards, interest rates can be quite high because these funds are unsecured and therefore carry a higher risk to the issuer.
With mortgages and automobiles, the interest rates are generally lower because these loans are secured, or backed by collateral. The risk of default is lower for the issuer of a secured loan. In the event a debtor stops making their payments, the bank or lending institution can reclaim the property the loan was originally secured against as payment.
This can have a negative impact on a person’s credit report, which could make it harder to get additional or future credit lines. Most lenders will review a potential borrower's credit report before issuing any funds to make sure that they have a history of repaying their debts as agreed and have not fully drawn upon all of their available credit.