What is Available Credit?

Summary: Your available credit (like a credit limit on a credit card) and how much of it you've used affect your credit score. Read on to understand available credit and how to manage it to maintain a good credit score.

what is available credit

By Ben Luthi
Reviewed by Lauren Bringle, AFC®

Available credit is a term used for any revolving type of credit and represents the difference between the amount you’ve used and the account’s assigned limit.

So what does available credit mean from a practical perspective? This article is here to help.

Understanding available credit on a credit card is especially important because it can affect your credit score and how lenders view you when you apply for a loan or another credit card.

Here’s what you need to know about the differences between your current balance vs. available credit.

Available credit vs. credit limit: What’s the difference?

If you have a credit card (a type of revolving credit), you may have heard the terms “available credit” and “credit limit.” While the two are connected, they’re not the same thing.

Your credit limit is the total amount of credit your financial institution allows you to use on the account, while your available credit is how much of that credit limit you've used.

For example, let’s say you have a balance of $5,000 on a credit card with a $7,000 limit. In this case, you have $2,000 in available credit. Once you use up all your available credit, your card’s issuer may start declining your transactions or slap you with an over-limit fee.

Available credit and installment loans

Because of the way installment loans are designed, there is no available credit involved. When you take out a $10,000 personal loan, for instance, you receive the full amount, minus any applicable fees, at the beginning of the repayment term and pay it back over time. There’s no option to pay some back and re-borrow that amount later.

If, however, you have a home equity or personal line of credit, that’s considered revolving credit, where you can use your available credit, pay it off to your lender and repeat. How a line of credit affects your credit history, however, can vary based on the type.

How your available credit can impact your credit score

How much of your available credit you’re using at any given time is a major factor in your credit score. This is primarily because borrowers who tend to max out their credit cards, for instance, may have a difficult time managing their finances and are more likely to struggle with making debt payments to their lender(s).

To calculate how much of your available credit you’re using, credit scoring companies use a ratio called the credit utilization rate. This figure is calculated by dividing your current card balance by its credit limit. For example, if you have a $4,000 account balance on a card with a $5,000 limit, your credit utilization rate is 80%.

Credit scoring models typically calculate your credit utilization for each individual credit card, as well as all of your credit cards combined, and the higher your utilization rate, the more it could impact your FICO score negatively. The same goes if you have a personal line of credit.

Both the FICO® Score and VantageScore® credit scoring systems give significant weight to your handling of revolving credit. More specifically, they are sensitive to credit utilization.

If you have a home equity line of credit, or HELOC, however, how much of your available credit you use won’t be considered in your credit utilization rate.

“Despite some misreporting on the issue, and the fact that both are considered “revolving” debts, HELOCs are not counted when credit scoring models calculate the revolving utilization ratio on your credit card accounts, as a HELOC is not considered a credit card account. Therefore, the fear that a heavily utilized HELOC may negatively impact your credit scores in the same way a nearly maxed-out credit card account might is unfounded,” Equifax and FICO credit expert and author John Ulzheimer writes.

Keep in mind, though, that how your utilization rate affects your credit score can change from month to month. If you have a high rate one month, for instance, then consolidate your credit card debt with a personal loan or pay down a high credit balance, your credit score could bounce back as soon as that activity is reported.

How much available credit should you use?

Many credit experts recommend keeping your credit utilization rate below 30%, but there’s no hard-and-fast rule or threshold where your credit score will plummet once you breach it.

Instead, it’s best to simply keep your utilization rate as low as possible. There are a few ways you can do this successfully each month, especially with credit cards:

  • Use the card sparingly: The easiest way is just to use your card a little each month and pay it off in full to build a positive payment history. If you want to take advantage of credit card rewards, however, you won’t earn much this way.
  • Time your monthly payment: Credit card issuers typically report your account activity and balance to the three national credit bureaus when your statement closes each month, which is reflected in your credit reports. So if you pay off your bill in full a couple of days before that date each month, the card issuer will either report a zero balance or whatever outstanding balance you’ve incurred in the meantime.
  • Make multiple monthly payments: If you use your credit card regularly and have a relatively low credit limit, it may make sense to make several payments throughout the month. That way, you can ensure you never bump up against your credit limit and also reduce the chance that your reported utilization will be high.

How to increase your available credit

Increasing your available credit can not only give you more flexibility with your credit cards or personal line of credit, but it can also help boost your credit score by reducing your credit utilization rate.

There are a few ways you can increase your available credit:

  • Pay down debt
  • Consolidate debt
  • Ask for a credit limit increase
  • Get another credit card

It’s important to consider your situation to decide which one is best for you. Here are some ideas to consider about each option.

Pay down your debt

It may take some time, but paying down your credit card balances is one of the easiest ways to work on increasing your available credit. Depending on the situation, it may also be a good idea to avoid adding more debt to your credit cards to avoid taking two steps forward and one step back. Your available credit will increase as the credit card issuer applies each payment.

Consolidate your debt

When you use a personal loan to consolidate credit card debt, you’re converting revolving debt into installment debt, eliminating the balances from the credit utilization rate equation.

Your available credit on your credit cards or line of credit will increase as soon as the debt is paid off. Your overall debt, however, won’t change. So you’ll still need a plan to pay off the consolidation loan.

Ask for a credit limit increase

If you’ve had your credit card for a while and have used it responsibly, you may consider requesting a credit limit increase from the card issuer. To do this, they may ask for current income information and run a hard credit check, which can affect your score. But if it helps your credit, it could be worth it.

Also, note that some cards even offer a credit line increase after you’ve made a certain number of on-time payments.

Get another credit card

Adding another credit card to your wallet, along with its available credit, will increase your aggregate available credit. It won’t, however, affect the available credit on your other credit card accounts, so it won’t necessarily boost your credit score.

The bottom line

Whether you have a credit card or a personal line of credit, it’s important to keep an eye on how much of your available credit you’re using. Because your credit utilization rate has such a big influence on your credit score, it’s important to try to pay down your balances and employ strategies to keep them relatively low.

If you happen to rack up a big outstanding balance one month, however, don’t fret. As you work on paying down your debt and increasing your available credit, your FICO score should respond positively.

About the author

Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero. See Ben on Linkedin.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

Editorial Policy

Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).

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Written on August 13, 2019
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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