What Is Available Credit?
Available credit is related to the account balance of a credit card or other form of debt. It refers to how much credit you have left to spend.
The amount of available credit can be calculated by subtracting your purchases (and the interest on those purchases) from the total credit limit on the account. The credit limit is the total amount that can be borrowed. Your total credit limit is usually determined based on your creditreport and gross annual income.
Key Takeaways
- Available credit refers to how much you have left to spend on a credit line.
- You can calculate available credit by subtracting your purchases from the total credit limit on the credit account.
- For credit cards and other types of revolving credit, payments increase your available credit.
- When you use more of your available credit, you credit score typically declines.
How Available Credit Works
Available credit is the difference between the total credit limit and the amount that you have accumulated through making purchases (in addition to the interest on the amount of their purchases).
For credit card holders, available credit is the amount that is left when you subtract all your purchases (and the interest on those charges) from themaximum creditlimit on your credit card. Available credit on revolving credit like credit cards can fluctuate.
Note
Your available credit can increase or decrease based on your purchase and payment history. You can check your available credit at any time on your credit report or credit card company's website.
For credit cards and most other types of debt, you must make monthly payments of both your principal and the interest. With credit cards (and other types of revolving credit), payments increase your available credit (which the borrower can then use for additional purchases). For all revolving credit accounts, including credit cards, your available credit will decrease when you make purchases.
Your available credit also decreases when accumulated interest is added to the account each month. Credit card companies issue a monthly statement that details all of your transactions, any interest accrued from the past 30 days, and your required payment amount.
The payment amount that you are required to make includes both principal and interest. Your principal is the amount of debt you accrued through making purchases. The amount of interest you have due varies based on the card's interest terms.
Available Credit vs. Credit Limit
Available credit and credit limit are similar terms. They are both related to the account balance of a credit card or other kind of debt. The credit limit is the total amount of credit available to the borrower.
Available credit refers to the difference between the credit limit and the account balance. Given the current balance on the account, available credit helps a borrower to determine how much they have left to spend.
When you've made no purchases, your available credit amount is equal to your full credit limit. When you use all of your available credit, your have reached your credit limit, and your available credit is equal to zero. The account has been maxed out and you can no longer make purchases (without exceeding your credit limit).
Knowing Your Available Credit
You should be aware of your available credit balance at all times so you don't exceed it and face penalties or damage your credit score. As you make additional purchases, and as more interest accrues, your balance will increase. Once you've reached your maximum credit limit, you can no longer spend.
Exceeding a credit account’s maximum limit, or carrying high balances with low levels of available credit, can negatively affect your credit score. The more credit you use, the lower your credit score.
What Is Your Available Credit Versus Your Balance?
Your available credit is the amount of credit you can use whereas your balance is the amount of credit you have already used. You calculate your available credit by subtracting your balance from your total credit line.
How Do You Increase Your Available Credit?
You can increase your available credit in several ways. First, you can pay down your debt if you have balances on revolving credit such as a credit card. You can also take out new credit to increase your available credit. You can also your current creditors to increase your credit line.
How Much Available Credit Should You Have?
Each person will have a different amount of available credit according to their financial goals and expenses. Most credit experts recommend keeping your credit utilization ratio below 30%, or using less than 30% of your total credit.
The Bottom Line
It's important to understand what your available credit is and how it plays a role in your debt and credit score. This way, you can make better decisions toward staying on a good financial track and improving your credit score. Monitor your credit reports from the major credit bureaus (Experian, Equifax, and TransUnion) to better understand your available credit.
