For many people, their credit card is a vital tool for handling their everyday expenses. From making purchases to paying for services, a credit card offers flexibility and convenience.
But to get the most out of your card, you have to know how it works. That means understanding your credit limit, current balance, and available credit.
Keep reading to learn the basics about available credit, why it's important, and how it affects your credit score.
What is available credit?
Available credit is the difference between your credit limit and your current balance. In other words, it's the amount of credit you can use for making purchases.
The amount of available credit you have fluctuates depending on how much credit you've spent and the amount you've repaid. With revolving credit (like credit cards and lines of credit), your payments go toward increasing your available credit.
For example, when you make a purchase with your credit card, your balance increases, and your available credit decreases. Then when you pay your bill, your balance goes down by the amount you paid, and your available credit goes back up.
Your available credit also decreases when interest accumulates on your account because you didn't pay back your full balance. If that happens, the next time you pay your credit card bill, you'll have to pay off your principal (the amount you spent) plus interest.
Your monthly credit card statement shows the details of all of your transactions, any interest you've accrued, and your minimum payment amount. But you can check your available credit at any time by logging in to your online banking website or app.
Available credit vs. credit limit
Your credit limit is the total amount of credit you can use on your credit card or line of credit. In contrast, available credit is the amount you have left to spend after making purchases and accumulating interest.
Before you draw money from your line of credit or make any purchases with your card, your credit limit and available credit are the same.
For example, you might have a credit limit of $5,000 on your new credit card. That means you have $5,000 available to spend. If you use your card to buy a computer for $750, your available credit will drop to $4,250 until you make a payment.
If you use up all of your available credit, that means you've reached your credit limit, and your available credit drops to zero.
Why it's important
The more available credit you have, the more you have left to spend.
But just because you have credit available doesn't mean you should use it. If you spend too much on your credit card, you risk not being able to pay off your entire balance when your monthly statement arrives. When you don't pay your balance in full, you accumulate interest, further reducing your available credit.
In general, you should avoid spending more on credit than you're able to pay back easily. But that isn't the only reason you should pay attention to your available credit.
Having more available credit can also make you seem less risky to potential lenders when they check your credit score.
How available credit affects your credit score
Credit utilization — or how much of your credit limit you use — is the second most important factor for your credit score (after payment history).
If you tend to carry a high credit card balance from month to month, your credit score will take a hit. That's why experts generally recommend keeping your account balance below 30% of your total credit limit.
Let's look at how credit utilization works, using the above example of a credit card with a limit of $5,000.
If you use your card to buy a computer for $750, a refrigerator for $750, and pay for $500 of car repairs, your balance will go up to $2,000, leaving you $3,000 of available credit.
A $2,000 balance on a limit of $5,000 equals a credit utilization ratio of 40%, which is higher than recommended and hurts your credit score.
If you pay the maximum amount at the end of the billing cycle, your available credit goes back up to $5,000, and your utilization rate drops to 0%. Then, if you only use your card for $500 of purchases the following month, your credit utilization will rise to 10%, resulting in a good credit score.
Credit scores are calculated whenever they're requested, so a high credit utilization ratio one month doesn't mean your score takes a long-term hit. Your score will re-adjust when you get your credit utilization back down to the recommended range.
How to increase your available credit
The easiest way to increase your available credit is to make a payment to your account. However, keep in mind that it sometimes takes a few days for a payment to process, so if you're trying to free up credit for a large purchase, you may need to make a payment several days in advance.
Another way to boost your available credit is to increase your credit limit. It won't reduce the balance owed, but it will give you more available credit to make purchases. Credit card issuers sometimes increase your limit automatically if you have a history of making payments on time. You can also request an increase, at which point your card issuer will review your account and credit history to determine if you're eligible.
Remember that requesting a credit limit increase leads to a hard inquiry on your credit report and will temporarily dock you a few points on your credit score. In general, you should avoid requesting an increase unless you're confident you can pay off your current balance.
Why don't I have available credit after payment?
If you've made a payment on your credit account and don't see an increase in your available credit, it may be because of a delay in payment processing. It sometimes takes a few business days for a payment to process and post to your account. Check with your credit card issuer or financial institution for details on payment processing times.
How do you ask for a higher credit limit?
The easiest way to request a credit limit increase is to call your credit issuer's customer service line using the phone number on the back of your card. Some credit card companies also allow cardholders to request an increase online.
How much available credit do I need to rent a car?
While it varies depending on the company and the car you're renting, you usually need to have enough credit to cover the rental cost plus about $200-$500.
The bottom line
Understanding available credit is crucial for you to make the best use of your credit cards and lines of credit. For the most positive impact on your credit score, keep your credit utilization rate below 30%.
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