Do You Know Your Total Credit Limit vs. Available Credit?
- February 28, 2018
- Posted by: Jeff Gitlen
- Category: Credit Cards
Having a credit card is like having a line of credit. It is issued with a credit line, which is the total amount of debt the credit card issuer allows you to have on your account. You can use your credit card to make purchases as long as you have available credit. Knowing the difference between your total credit limit and your available credit is important when it comes to effectively managing your credit.
Credit Limit vs. Available Credit
What is Your Total Credit Limit?
When you apply for a credit card, the credit card issuer determines how much credit it is willing to extend based on your creditworthiness and ability to pay the balance on your card. For the most creditworthy borrowers, the credit card issuer might approve a $10,000 total credit limit, whereas for borrowers with fair credit, the limit might be $1,000.
The longer you have your credit card and maintain an on-time payment history, the credit card issuer may increase your credit limit. But, at any given time, your total credit limit is the maximum amount you can borrow.
Depending on the credit card issuer and the terms you agreed to when establishing the account, you might be able to go over your total credit limit, but there are usually penalties for doing so. Consumer regulations restrict over-the-limit penalties to $25 – or the amount you went over the limit if it is lower than $25.
What is Your Available Credit?
Your available credit is the amount you can use for purchases at any given time. It is the difference between your total credit limit and your account balance. If your total credit limit is $5,000 and your account balance is $3,000, you can still spend $2,000, which is your available credit.
Obviously, it is important to know your available credit so you can avoid exceeding your total credit limit, which could result in penalties or having your payment declined. Because we live in the digital age, you can check your available credit at any time using your online account management or an app on your smartphone.
Credit transactions can be recorded in real time, so the amount of credit available shown online or in your app should be accurate up to the minute in most cases. Some transactions will show as “pending” and might not yet be reflected in the account balance, but it would still reduce your available credit. You should not rely on your billing statement to check your available credit because it may not reflect recent transactions that have posted to your account.
You also need to know your available credit if you travel. In order to rent a car or book a hotel room, you need to have a certain amount of available credit or you will be denied. Car rental agencies and hotels typically charge your account upfront for the full amount of your booking. You need to ensure you have enough available credit to cover the amount.
Another big reason to know your available credit is to monitor your credit utilization. Your credit utilization is a major factor used by the credit bureaus in determining your credit score. If your credit utilization exceeds 30 percent of your total credit limit, it can hurt your credit score.
To the credit bureaus and lenders, your credit utilization is a strong indication of how well you manage your credit and whether you rely too heavily on credit. To maintain a good credit score and appear as a good credit risk to lenders, it’s better to try to keep your credit utilization well below 30 percent of your total credit limit.
How to Increase Your Available Credit
If you want more available credit, you can ask your credit card issuer for a credit limit increase. If you are granted an increase it will not only increase your available credit, it will also improve your credit utilization, which may have a favorable impact on your credit score.
You can also apply for another credit card to increase your available credit. However, if your current credit utilization is too high, a lender might not approve you for more credit. The ideal course for increasing your available credit is to work on paying down your account balance.