Confused about the difference between available credit and credit limit? They might seem similar, but they are two different things in reality. It is crucial to understand the difference to ensure your account is not considered in default.
Your available credit is the amount of money you can still use on your card, depending on how much you have already spent. On the other hand, your credit limit is the total amount of money you can borrow at any one time.
Your available credit is the money that you can spend. You can calculate your available credit by subtracting your statement balance from your credit limit.
Available credit = Credit limit – Statement balance
Understanding your available credit can help prevent you from crossing your credit limit. Read on as Vital explores how your available credit fluctuates and how you can track it.
What is available credit?
Simply put, your available credit is the amount that you are authorized to use to finance purchases on your credit card. This amount fluctuates as your statement balance and credit limit change.
Let’s look at this with a couple of examples.
Example 1
Assume your credit limit is $20,000. This is the total credit available to you. Out of this, you have already made purchases worth $8,000. So, your available credit is the difference between your credit limit and the amount you spent.
Available credit = Credit limit – purchases
Available credit = $20,000 – $8,000 = $12,000
Now, let us assume when your statement balance was issued at the end of the month, you paid back $7,000 of the outstanding amount. After paying back this $7,000, your new available credit would be your credit limit minus the outstanding amount plus the paid back amount.
Available credit = Credit limit – purchases + Amount paid back Available credit = $20,000 – $8,000 + $7,000 = $19,000
So this way, your available credit changed from $12,000 to $19,000.
Example 2
Now, let us assume that your credit limit is $20,000, out of which you made purchases worth $10,000. So, your available credit is now $10,000.
Available credit = Credit limit – purchases
Available credit = $20,000 – $10,000 = $10,000
But, your card company decides to extend your credit limit by $5,000, making your new credit limit $25,000. So, assuming you didn’t make any more purchases on the card, your available credit increased from $10,000 to $15,000 because of the extended credit limit.
Available credit = Original credit limit + extended credit limit – purchases
Available credit = $20,000 + $5,000 – $10,000 = $15,000
These examples show how your available credit fluctuates every time you make a purchase, pay back debt, or extend your credit limit.
If your available credit is $0, you don’t have any credit remaining to make more purchases. This happens either because you have used up your entire available credit or your credit card account is delinquent.
How can I check my available credit?
It’s typically smart to know how much available credit you have on your card. This can help you avoid embarrassing card declines or help if you’re stuck in an emergency.
For example, imagine being on a trip to Europe and swiping your card only to realize you have exhausted your available credit. Situations like this are more common than you’d imagine. It’s always worth knowing how much available credit you have.
So here are some ways for you to check your available credit:
- Call the number on the back of your credit card and ask your card issuer how much available credit you have.
- Check by logging into your online credit card account through a mobile or web browser.
- If your credit card company has an app, you can download it to check your available credit.
What is the importance of having available credit?
The more available credit you have, the more money you can spend. Your credit card won’t be of much use if you have no available credit. However, there are several more reasons for you to have a substantial amount of available credit.
Having a large amount of available credit can help your credit score. The amount of money you spend out of your credit limit determines your credit utilization ratio, which can affect your credit score.
For a good score, it’s advised to keep your credit utilization ratio below 30%. This means that the more available credit you have, the lower your ratio is and the better your score may be. For example, if you aim to keep your credit utilization ratio below 30%, you need to have at least $7,000 as available credit on a card with a credit limit of $10,000.
What happens if you use more than your available credit?
Usually, if you have exhausted your available credit and try to make another purchase, the transaction will be declined. However, if you need to make an important transaction and your limit is exhausted, request the company to process an over-the-limit transaction. Your credit card issuer may charge you an over-the-limit transaction fee or a penalty fee for such purchases.
Alternatively, your available balance will reflect negative numbers if you cross your credit limit. If you’re not aware that your available credit is in the negative, you could end up paying a hefty penalty fee for crossing your credit limit without realizing you’re doing so.
How can I increase my available credit?
As you pay back your money borrowed on credit, your available credit increases. However, the money you pay the card company may take a few days to reflect on your available credit. So, if you’re trying to free up credit for a purchase you want to make, try paying back your outstanding dues a few days before you need the new credit.
Another way to increase your available credit is to request your card company to increase your credit limit. Once you make this request, your credit company checks your credit history and credit score to see if you qualify for an increased limit. If your request is approved, you will have the same outstanding debt but have more available credit.
What is the difference between available credit and credit limit?
Available credit = Credit limit – purchases
Available credit is equal to your credit limit minus the money you have spent.
Your credit limit stays constant unless the card company changes it. On the other hand, your available credit keeps fluctuating as you make purchases on credit or pay back debt.
Your available credit and your credit limit are the same when you have made no purchases on your credit card. That means that you haven’t used any money from the total credit that the company is willing to lend you.
Vice versa, when you have maxed out your credit limit through purchases, your available credit is $0. If you make any more purchases on your card, you will exceed your credit limit.
In such a case, either your transaction fails, or you’re charged an additional fee on the over-limit purchases. To avoid this, it’s smart to regularly check your available credit.
How can I ask for an increased credit limit?
If you regularly fall short on available credit, consider asking for an increased credit limit. Sometimes, card companies increase your credit limit automatically after you update an increased income. Other times, you have to request an increase.
You can request your card company to increase your credit limit via email or phone. It’s a smart idea to explain why you need the additional credit if your income hasn’t grown and assure the credit company that you will repay the outstanding balance each month.
While requesting an increase in credit, remember to keep these handy:
- Proof of your annual income
- Evidence of your employment status
- A suggested new credit limit
In most cases, the credit company informs you of their decision almost instantly. If approved, remember to use your increased credit carefully and repay the statement balance in full before the due date.
How can Vital help?
Vital is a credit card company that pays you to spend responsibly. Vital’s mission is to empower its users with the knowledge they need to make intelligent financial decisions. So what are you waiting for? Apply for a Vital card now.
Sources
What is a Credit Utilization Rate? | Experian
What Should My Credit Card Utilization Be? | Experian
Credit Limit Increases: What to Know | Equifax®
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.