Credit cards can be confusing to those who are new to them, and it takes a while to get used to all the different terms and phrases that are used.
So what does available credit mean? We will take a look at this question as well as comparing it to a credit limit and considering how much of your credit is available for you to use.
Finally we’ll examine how you can increase your available credit limit.
What Is Available Credit?
Available credit is the amount you have left to spend on a credit card or other forms of credit such as a loan. The way to calculate what your available credit is to deduct the total amount owed from your credit limit.
The amount owed on your credit card will not purely be the cost of the purchases but also the interest that will be charged on them. You also need to take into account any fees that are applied to the credit card either annually or monthly.
Your credit limit is the total amount that can be borrowed or used through the card. Many things will affect your credit limit and this in turn can affect the level of your available credit.
Understanding Available Credit
So your available credit is the difference between the amount that you have borrowed including interest and fees and the credit limit that has been set by the lender. This amount of available credit is what you can spend on your credit card or loan.
For credit card holders the amount of available credit can fluctuate based on the cardholder’s payment history and purchases.
It’s possible to check the available credit on your card at any time. It is normally included in monthly statements or available on your banking app.
Every month when you make your payment towards your credit card debt some of that money will reduce the debt and some will pay the monthly interest on the total amount borrowed.
When you make a payment towards reducing your credit card balance you are also increasing the amount of credit that is available to you. Similarly when you make purchases with your credit card your available credit decreases.
Available credit also decreases when any accumulated interest is added to your account.
Available Credit Vs Credit Limit
Available credit and credit limit may sound like the same thing but as we have discussed they are different aspects of your credit card or loan status.
Credit Limit
When you apply for a credit card or loan you will be told how much you can borrow. This is your credit limit. It is typically calculated according to your credit score, payment history, employment stability and gross annual income.
If you have a low credit score then lenders are likely to set your credit limit quite low. However, over time, if you make regular on time payments, maintain a low credit utilization ratio and maintain a good credit history then your lender may increase your credit limit.
Most lenders advise not using more than 30% of your credit limit in any one month and clearing the balance at the end of each month.
This shows financial responsibility and will make it more likely that the limit will be increased in the future if your payments are made on time.
Available Credit
When you first receive your credit card you will be told how much your credit limit is. This should not be seen as a target to hit each month, rather you should avoid ever reaching your maximum credit limit.
If you can afford to, restrict your credit usage to around a third of your credit limit.
The amount that you spend on your credit card will reduce the amount of credit that is still available. Interest on the card set by the lender will similarly reduce your available credit as will any fees that are due on the account.
How Much Available Credit Should You Use?
Where possible resist the temptation to spend more than 30% of your available credit. Not only will this reduce your monthly payment on your credit card but also keeps your credit utilization ratio at a low level.
Both of these are factors which are taken into consideration when credit bureaus determine your creditworthiness. If you consistently max out your credit card it may affect your credit score in the long term.
Of course, there are times when you may need to spend more on your credit card or rely on loans. This is not a problem as long as it is not a regular occurrence, and you pay off the balance at the end of the month.
If you are regularly hitting a high utilization rate with your credit card it will have a negative impact on your credit standing.
Increasing Your Available Credit
You can increase your available credit by making larger payments each month or clearing the balance of your card entirely. The available credit will be increased until you make a new purchase on your credit card.
Another way to increase your available credit is to take out a new credit card or personal loan.
However, be aware that every time you do this a hard check will be made on your credit rating and this can have a negative impact on your credit score.
The more credit you apply for the larger your monthly payments will be so make sure that you don’t take on more debt than you can afford.
Finally, another way to increase the credit available to you is to request an increase on your credit limit.
This will only be considered if you have a good or exceptional credit score and have made consistent, on time payments towards your credit card debt.
Final Thoughts
The concept of available credit is relatively straightforward. It is your credit limit minus the amount that you owe on your credit card or loan.
We hope this guide to available credit has been helpful.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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