Available credit: Meaning and examples in credit cards

Available credit is an important component of credit accounts. It refers to the amount of credit unused on a credit card account or line of revolving line of credit. You can calculate your available credit by looking at your total credit limit and the amount currently used.

Before swiping your credit card or borrowing money from your credit accounts, it's essential to understand what available credit means to ensure you don't go over the limit. Here's what you need to know about available credit and how it impacts how much you can really spend with your credit card.

What does available credit mean?

Available credit refers to the amount of unused credit remaining on your credit card or any credit account. It's the difference between the credit limit given to the cardholder and the cumulative balance accrued through transactions.

Let's say your total credit limit on your credit card is $5,000 and your current balance is $2,000. Your available credit stands at $3,000. This number represents the amount of funds you have left on your credit limit you can spend for the current billing cycle.

If you have no more available credit, it means you have spent all of your card's credit limit. You can pay off some of the balance to free up available credit or wait for the billing statement to pay your balance in full. Going over your available credit can result in your credit card being declined or incurring expensive interest charges.

Credit limit vs. available credit

Credit limit and available credit are closely related terms. Every credit account has a credit limit. The credit limit determines the maximum amount you can spend on credit. All revolving credit accounts, like credit cards, have a credit limit. For example, if your credit card limit is $5,000, you can spend up to that amount. Credit card companies use factors like credit history, repayment behaviour, and income to predetermine your credit limit.

Available credit refers to the portion of the credit limit that remains untapped. You calculate it by finding the credit limit minus your current balance on your credit card. It indicates how much a cardholder can continue making purchases without surpassing their borrowing capacity.

Available credit fluctuates based on your transactions and how much of the current balance you repay. When you purchase using your credit card, your available credit declines as you've used a portion of the total credit limit. When you repay your current balance, your available credit increases.

How much available credit should you use?

Determining how much available credit you should use depends on various factors related to your unique financial situation and goals. Here are some guidelines to consider to help you make informed decisions:

Maintain a low credit utilization ratio

The credit utilization ratio is the percentage of the total credit limit you're using. Look at your total and available credit on your credit card and calculate how much of your limit you've already spent. Financial experts recommend keeping your credit utilization ratio below 30% to maintain a good credit score.

Align with your budget

Your budget determines how much of your disposable income you can afford to spend and save for different purchases and goals. Consider your monthly income, expenses, and savings objectives. Avoid overusing credit to finance purchases beyond your means or to cover expenses you can't afford to repay with your current income. Sticking with your budget ensures you can manage financial obligations responsibly.

Emergency fund

While you can use available credit as a safety net for emergencies, a dedicated emergency fund is always a good idea. Ideally, your emergency savings exist in a separate savings account to cover unexpected expenses or financial setbacks. Relying solely upon your available credit for emergencies can lead to debt accumulation and financial stress. Since your available credit fluctuates, it's also not as reliable as an emergency fund.

Consider long-term financial goals

Evualalbe how your credit usage aligns with your long-term financial goals, like retirement, purchasing a home, or repaying debt. If you're spending too much on credit, you may not have enough funds left to allocate to various savings goals. Using a credit card responsibly can help you reach your objectives faster.

Pay off balances in full

Aim to pay your credit card balances in full to avoid interest charges. Otherwise, you may carry an outstanding balance, which can become burdensome over time and make your debt more expensive to pay off.

What factors determine your total credit limit?

Credit card companies use several factors to determine how much credit you should have.

Credit score

Credit card issuers often use credit scores, such as FICO scores, as a key factor in determining credit limits. These scores are based on factors like your credit history, payment history, credit mix, and new credit inquiries. Understanding how credit scores are calculated helps you improve your score over time to qualify for higher credit limits.

Credit history

Credit history includes the length of your credit history, payment history, and negative remarks on your credit report, such as bankruptcies and late payments. A strong credit history demonstrates responsible borrowing habits and can increase the likelihood of receiving a higher credit limit.

Income

Credit card issuers assess an applicant's income to determine their ability to repay credit card debt. A higher income generally correlates with a higher credit limit since the individual has the financial means to manage larger lines of credit.

Debt-to-income ratio

The debt-to-income ratio compares an individual's total monthly debt payments to their gross monthly income. A lower debt-to-income ratio indicates the applicant has sufficient income to manage additional credit responsibly, potentially leading to a higher credit limit.

Employment status

While not always a primary factor, credit card issuers may consider an applicant's employment status when determining credit limits. Applicants with steady employment and income may be more favourable for receiving higher amounts of credit.

How do you increase your available credit?

A credit increase involves several strategies to help you demonstrate responsible credit management. Here are some steps to take if you want to increase your available credit:

• Monitor your credit score: Regularly monitor your credit score and report to ensure they accurately reflect your financial habits. A higher credit score can increase your chances of qualifying for a credit limit increase. You can get your credit report from a major credit bureau or request a free credit score from your credit card issuer.

• Pay bills on time: Consistently pay your bills by the deadline of the current billing cycle. Late payments can harm your creditworthiness and may hinder your ability to secure a credit limit increase.

• Manage your debt: keep your credit card balances low relative to your credit limit. A high credit utilization can signify financial risk to lenders and make it more challenging to increase your available credit. Aim to keep your credit utilization below 30% to maintain a good credit profile.

• Request a credit increase: Contact your credit card issuer and request to increase your credit limit. They may ask for your income, employment status, and changes to your financial circumstances.

• Demonstrate responsible credit usage: Prove to card issuers you can manage credit card debt. Issuers are more likely to grant limit increases to customers who demonstrate good credit management habits.

• Review your credit card terms: Some credit card issuers automatically review cardholder accounts for credit limit increases periodically. Check if your card's terms and conditions have automatic credit limit reviews and ensure your account is eligible. Individuals with high credit scores may be pre-approved for one.

• Improve your financial profile: Work on improving your financial profile, such as paying down existing debt, increasing your income, and maintaining stable employment. A stronger financial profile can increase your chances of qualifying for a higher credit limit increase.

Pros and cons of increasing your credit limit

Increasing your credit limit can have both advantages and disadvantages, depending on your situation and how responsibly you manage your credit. Here are some pros of increasing your limit:

• Improved purchasing power to make larger purchases or handle unexpected expenses more comfortably.

• Enhanced financial stability with more flexibility in managing finances and handling cash flow challenges.

• Potential to build your credit by increasing your available credit and reducing your credit utilization ratio.

• More opportunities to maximize on the rewards and benefits offered by the credit card.

• More convenience by reducing the need to constantly monitor your balance or make frequent payments to stay within your limit.

Here are some cons of increasing your limit:

• Increasing your limit can make it more tempting to overspend, leading to increased debt.

• Carrying a balance on your credit card with a higher limit results in higher interest charges if you can't repay the balance in full monthly.

• Each increase may result in a hard credit inquiry, which shows on your report and can cause your credit score to decrease.

• A higher credit limit may increase your exposure to identity theft or fraudulent activity.

• Higher credit limits may increase your debt-to-income ratio.

Build strong credit management skills with KOHO

Your credit score has a big influence on your current and future available credit. Lenders review your credit history to determine your creditworthiness and how much credit they should extend. With strong credit management skills, you can increase your chances of qualifying for higher limits, making it easier to reach important milestones.

KOHO provides several financial products and expert advice and insights to help you build your credit management skills. With a virtual credit card, you can spend conveniently from your mobile device. We report your credit activity, including on-time payments and credit utilization rates, to the credit bureaus to help you build credit.

We understand emergencies happen, and you may not have enough available credit to cover unexpected expenses. Overdraft protection coverage gives you up to $250 zero-interest cash advance, so you don't incur additional fees for exceeding your limit. Unlock more funds by making regular, on-time payments.

Whether you're looking to earn interest on savings or build credit with KOHO to secure financing in the future, we've got you covered.