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Available Credit Meaning
Available credit is the amount of credit that a borrower has left to use on their credit card or line of credit. It represents the difference between the borrower's credit limit and the current balance owed on the account. It is used to plan financial expenses.
It is an important metric for borrowers to keep track of, as it helps them understand how much more credit they can use without exceeding their limit. It is determined by the credit limit allocated when purchasing a credit card or loan. The available credit limit can vary depending on the type of loan or credit card taken and the credit terms of the loan or credit card.
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- Available credit is the amount of credit remaining on a credit card after the borrower has used some of their allocated credit limits.
- The main purpose is to determine how much credit is left for the person to use on purchases, utilities, and other expenses.
- To calculate it, subtract the utilized credit from the total credit limit allocated to the borrower. This amount is typically shown on the monthly statement issued by the card issuer.
How Does Available Credit Work?
Available credit on a credit card is the remaining balance a borrower can utilize for purchases. It helps the person determine how much credit they can borrow against their credit card, but the available credit depends on the card issuer and the consumer's spending behavior.
The available credit on a credit card can increase as well. Individuals can sometimes increase their its limit by requesting the lender or changing their credit behavior. For example, making on-time payments, reducing outstanding debt, or improving credit scores can increase the available credit limit. However, it is important to note that not all lenders allow for an increase in credit limits, and any changes to credit behavior may take time to reflect in the available credit limit.
How available credit works depends on the credit card or line of credit. For credit cards, the borrower can use their credit to make purchases or take out cash advances. However, borrowers may face fees, penalties, or interest charges if they exceed their available credit. In addition, some credit card issuers may lower the borrower's credit limit or increase their interest rate if they consistently use all available credit.
To maintain a healthy credit score, borrowers should aim to keep their credit utilization ratio – the amount of credit used compared to the amount of credit available – below 30%. For example, if a borrower has a credit limit of $10,000, they should try to keep their balance below $3,000 to avoid damaging their credit score. By regularly monitoring their available credit and credit utilization, borrowers can maintain a healthy credit profile and avoid the negative consequences of exceeding their credit limit.
Examples
Let us look at the examples of available credit to understand it better:
Example #1
Suppose Jenna applies for a credit card from a renowned financial institution. After availing of the card, she got a credit limit of $3,000 on her credit card. Thus, she could make purchases on her own. For example, at the initial purchase of a $200 bag, the total available limit was $2800. However, due to excess expenditure over it, her available limit dropped to zero. In addition, Jenna delayed the repayment of the owed amount. As a result, she had to pay additional interest on it.
Example #2
According to a Forbes article on credit card limits, on credit card limits if credit card holder exceeds their credit limit, they may be charged an over-the-limit fee, and their available credit will be reduced until the balance is paid down.
For example, let's say John has a credit limit of $3,000 on his credit card and a current balance of $2,500, leaving him with $500 of available credit. If John spends $1,000, he will exceed his credit limit by $500, and his available credit will become negative. John will likely be charged an over-the-limit fee, and his credit card company may reduce his available credit until he pays the balance. If John pays his balance to $2,000, he will again have $1,000 of available credit ($3,000 - $2,000).
Available Credit vs Current Balance vs Credit Limit
Available credit, current balance, and credit limit are different components of a credit card bill. It is the remaining credit balance after using some of it, the current balance is the amount the borrower owes on the credit card, and the credit limit is the total amount of credit allocated to the borrower. The available credit depends on the borrower's spending habits, the current balance can be up to the credit limit, and the borrower's credit score determines the credit limit.
| Key Points | Available Credit | Current Balance | Credit Limit |
|---|---|---|---|
| Meaning | The leftover credit balance after using some of it. | The amount a borrower owes on the credit card. | The total amount of credit allocated to the borrower. |
| Purpose | To determine the remaining credit available on the card. | Find the amount of credit payable to the card company. | To determine the maximum credit given to a borrower. |
| Limit depends on | It can differ. If the borrower keeps spending, the limit will fall and eventually become zero. | It can be as high as the credit limit. For example, if the credit limit is $2500, the current balance can be $2500 or less. | It depends on the credit score. The credit limit will be high if the person has a good credit score. |
Frequently Asked Questions (FAQs)
Cash credit refers to a short-term loan a borrower can access through their bank account or credit card. On the other hand, available credit refers to the remaining credit limit a borrower can use on their credit card or line of credit. While cash credit provides immediate access to cash, available credit represents the amount available for future purchases.
The ideal amount of available credit depends on personal financial circumstances and goals. Having some available credit demonstrates creditworthiness and responsible financial management. Maintaining a credit utilization rate of less than 30% is recommended.
Yes, the item typically resets after payment is made toward the outstanding balance on a credit card or line of credit. When a payment is made, the amount of credit used is freed up and becomes available for future purchases.
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