Credit cards can be confusing, especially for first-time users. In theory, you have a set amount of money you can use whenever and wherever you want, and pay back later. However, there's something called available credit that makes things a bit different in practice.
So, what is available credit? Simply put, it's the amount of money you have left after using a portion of your credit limit. Every time you make a purchase and your credit card balance increases, your available credit decreases. See where we're going with this?
If you're still unsure, don't worry—in this article, we'll explain the available credit meaning in detail, explore why it's important, and answer a few common questions about it.
Money matters—but so does happiness. Browse these amazing opportunities on The Muse and find the perfect fit for you »
What does available credit mean?
Your available credit is the amount of credit limit you have left to use after making a purchase. Each new purchase increases your current credit card balance, which in turn decreases your available credit. In the same way, when you make a payment that amount becomes available again.
If your available credit is negative, it means that you've maxed your credit card and have no limit left to use until you pay down the balance.
Bank and credit card apps usually update this information everytime you make a purchase. If your credit card account doesn't do this automatically, you can figure out your available credit by subtracting your current balance from your credit limit.
For instance, let's say your credit limit is $1,150 and you make two purchases totaling $273,99. Your available credit would go down to $876,01 ($1,150 - $273,99). If you make more purchases, the charges will add up with those $273,99 and your available credit will decrease accordingly.
It's important to note that any interest charges from your bank are also deducted from your credit limit. Keep this in mind when calculating your available credit or deciding whether to pay the full balance or just make minimum payments.
If you pay your credit card balance in full at the end of the billing cycle, including any interest charges, your credit limit is restored. This will then be your available credit until you make a purchase.
Current balance vs. available credit
Your current balance is the running total of your purchases during the billing cycle. Every time you swipe your credit card to make a payment or purchase, that amount gets added to your current balance, automatically shrinking the available credit.
Be careful to not confuse the current balance with the statement balance. A statement balance is the total amount of all of your purchases at the end of the billing cycle. It can be paid in full or in minimum payments—which might add an interest rate on the balance you didn't pay.
Available credit vs. credit card limit
You might be wondering, “Why is my available credit less than my credit limit?” This is a common question. As mentioned, your available credit is the difference between your credit limit and your current balance, which is why it appears lower.
Your available credit and your credit limit only equal each other when you pay your balance in full and don't make any more purchases. Which leads to another question: “Can I spend more than my available credit?” The answer is yes and no.
Most credit card companies will deny new transactions if you've reached your credit limit, but there are others that may allow clients to exceed their limit, according to their own policies. So, even if your credit card company offers this option, your request still can be denied.
Why is your available credit important?
Your available credit is important because it can directly impact your credit score. Credit bureaus, such as FICO® and VantageScore, collect multiple information about your financial habits to determine your scoring points. One key factor is your credit utilization ratio.
“Basically, it's the amount of credit you’re using compared to what you have available,” says Alan Andrews, Commercial Financial Specialist at KIS Finance. “For example, if you have a credit card with a $10,000 limit and you've used $3,000, your credit utilization ratio is 30 percent.”
Ideally, your ratio should be under 30%, Andrews says, but the lower, the better. This lets credit bureaus know that you manage your money wisely. Combined with other factors, such as paying your bills on time, for example, this will look good on your credit report and likely increase your score. Otherwise, you might get the opposite effect. “If you have high-level utilization, it can make lenders nervous, negatively affecting your credit score.”
A low score can block you from credit opportunities like car loans, home loans, or renting property. To avoid exceeding the ideal credit utilization rate, you can reduce your expenses or ask for a credit limit increase, while maintaining your usual spending pattern.
“It also helps to spread your spending across multiple credit cards if you have them, instead of maxing out one card,” Andrew says. “This can keep individual card utilization lower, which is good for your score. Just use caution while using this strategy to resist the urge to overspend.”
FAQs
Is available credit good or bad?
Available credit isn't inherently good or bad—that depends on how much available credit you have compared to your current balance. Ideally, your credit utilization ratio should be under 30%. If it's over 30%, it's bad because it might lower your credit score, but if it's under 30%, it's good because it shows lenders that you're responsible with your finances.
Does available credit mean I have money?
Yes, available credit means you have money left to spend on your credit card. Just keep in mind that every time you make a purchase, the total amount gets deducted from it, so your available credit shrinks accordingly.
Does my available credit reset every month?
No. If you're wondering “When does available credit reset?” know that it only goes back to the original amount if and when you pay for your credit card balance in full. Any unpaid balance on your credit card is deducted from your limit, which reduces your available credit.
Why does my available credit say $0 after payment?
This can happen for a couple of reasons. For example, your payment hasn't cleared yet (it can take a couple of days even if you pay on time), your payment was delinquent (which can result in penalties from the credit card issuer), or the issuer decided to replenish your available credit, which is allowed, according to the Office by the Comptroller of the Currency (OCC). When in doubt, contact your bank or credit card company for more information.