Credit limit is maximum level of credit sales that could be outstanding for payment after which customer will be denied from issuing further credit.
Customer needs to pay his/her debt to keep the balance outstanding for payment below credit limit to purchase on credit up to credit limit.
Lower the balance outstanding for payment more customers is able to purchase on credit.
The purpose of setting credit limits is to limit for risk of default by customer.
Credit limit is set taking account for age of customer, previous experiences with customer, financial stability of customer, credit limit offered by competitors to a customer etc.