When you think about available credit, you probably figure that the more you have, the better off you are. In general, that’s true.
But there’s no magic number for available credit. Whether your available credit is $1,000 or $10,000, you can do well, as long as you manage it responsibly. Here’s how you can do that.
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What Is Available Credit?
Available credit is the unused portion of credit on a revolving account, such as a credit card. It is what’s left when you subtract purchases and interest charges from your credit line. If you have a credit limit of $5,000 and you owe $1,000, then your available credit is $4,000.
Credit Limit vs. Available Credit
Available credit is different from your credit limit. Your credit limit is the maximum amount you can charge on your credit card, not what’s available to charge. Your credit limit is a fixed number, while your available credit will fluctuate each time you use your card or make payments throughout the month.
The relationship between credit limit and available credit — called credit utilization — is what actually impacts your credit status, however. Credit utilization is the ratio of your balances owed to your credit limits on all revolving accounts. It is expressed as a percentage.
If you owed $1,000 and had a credit line of $5,000, your credit utilization would be 20%.
“Credit utilization is a more important factor than available credit,” says Tommy Lee, senior director of scores and analytics at FICO, the credit-scoring company.
That’s because credit utilization is a way to measure how well you manage the credit you have. As such, it’s also a key factor in the FICO credit score calculation — 30% of it, in fact.
“Our predictive analysis has shown that those who have lower balances compared to their limits are less risky,” Lee says. “Therefore, having a low credit utilization will help you have a better FICO score.”
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How Much Available Credit Should You Use?
While the specific amount of available credit doesn’t matter all that much, your credit utilization number is important. For a good credit score of at least 670, aim for a credit utilization ratio of 30% or less. For an exceptional credit score higher than 800, use only 7% to 10% of your available credit. That means you’ll want to have 70% or more of your credit available at any time.
Having an adequate amount of available credit is generally a good thing, says Bruce McClary, vice president of membership and communications for the National Foundation for Credit Counseling and former U.S. News contributor. “It can be a benefit if you run into an emergency and need to cover an expense right away,” he says.
And that’s not the only reason to use your available credit wisely. “The biggest factor in the decision if you’ll qualify (for a new card or loan) is going to have to do with your capacity to repay, but also how you’ve maintained your existing line of credit,” McClary says.
How Available Credit Can Affect Your Credit Score
A large amount of available credit can signal to the credit scoring companies that you’re handling credit well, but it doesn’t tell the whole story. If you don’t have a plan to repay your debt, that means your credit utilization will increase and negatively affect your credit score.
“FICO scores consider utilization as more important than the total credit limit extended to a customer,” says Lee.
Keeping credit utilization low — meaning, you have a lot more available credit than debt — will work in your favor.
Managing your available credit is all about making prompt payments and not letting balances accumulate. Your credit card issuer may offer balance alerts, which can be helpful.
“In addition to payment reminders, you can set up notifications regarding when your balance has reached a certain threshold,” McClary says. This tool can help you avoid eating up too much of your available credit without realizing it.
One more tip: Do not apply for more credit than you need. “A lender may come back to you and say, ‘We pulled your credit report, and we see all these unused lines of credit,'” adds McClary, who says he used to work in an underwriting role and often saw this. Having too much available credit could raise questions with lenders or scare away others.
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What Happens if You Use More Than Your Available Credit?
Using more than your available credit means you’ve tried to go over your credit card limit. In most cases, if you try to make a purchase that will exceed your card limit, the transaction will be declined.
With some credit cards, the transaction may still go through, but only if you opted in to allow that to happen. If you did, you will likely have to pay an over-limit fee, which can range from $25 to $35. Another consequence could be that your credit issuer increases your credit card interest rate as a penalty if you go over multiple times.
How to Increase Your Available Credit
You can increase your available credit in two ways: Pay down the amount you owe or ask for a credit line increase. The example below shows how this works.
If you have a $5,000 credit limit but owe $1,000, you have $4,000 available to use (a credit utilization ratio of 20%). If you pay your balance off, your available credit bumps back up to $5,000. But if you ask your issuer for a credit line increase and you’re approved for $7,000, though you still owe $1,000, your available credit would increase to $6,000 and your credit utilization ratio would drop to 14% without your making a payment.
More from U.S. News
How to Eliminate Credit Card Debt
What Are the Advantages of Having a Credit Card?
How Credit Cards Affect Your Credit Score
How Much Available Credit Should I Have? originally appeared on usnews.com
Update 03/21/23:
