Available Credit: What It Is, Why It’s Important, and How to Use It Sensibly!
Oftentimes, the world of credit is bewildering. There are countless new words and acronyms to get used to, math to figure out, and a plethora of forms and documents to fill. What makes it all the more daunting is that money—and often quite a large amount of it—is directly involved.
At Grow Credit, we don’t think the credit world should be bewildering. That’s why we have our blog, which is a one-stop-shop of information so folks can wrap their heads around all-things credit!
In today’s post, we’re making the topic of available credit easy to understand for everyone.
Specifically, you’ll be learning what “available credit” means (on top of additional lingo, such as “credit limit”). You’ll also understand why, exactly, available credit is so important, how to use it in a responsible and sensible manner, and the dangers of maxing out the credit that’s available to you—plus much more.
To get clued-up, just read through the sections below:
What is available credit?
How does available credit and credit limit differ?
Why understanding available credit is important
How to increase your credit limit (and available credit)
Grow Credit’s Mastercard will help your credit history, score, limit, and available credit!
Let’s jump straight in.
What is available credit?
Available credit is the amount of credit that’s available to use on a credit card—in other words, it’s your credit limit minus your account balance.
The credit that’s available to you differs depending on your credit limit (this is the maximum amount you can spend at any given time), and how much has already been spent in a month. This means, then, that your available credit changes on a monthly, weekly, and even daily basis, in accordance with how frequently your card is being used. (You can calculate your available credit at any given time by deducting the sum of your monthly purchases (and any interest that’s ensued) from your total credit limit. Alternatively, if there’s an app or web page that offers you digital access to your account—like Grow Credit does—you can check your available credit there, too.)
Let me illustrate how available credit works with a quick, straightforward example.
If you have a credit limit of $2500, and you’ve spent $100 (including interest; this is your outstanding balance) in the first week of the month, that means you’ll have $2400 available credit to spend for the rest of the month. If, by the second week, you’ve spent a further $250 in credit (now your outstanding balance is $350), you’ll then have $2150 available credit for the month. If you don’t spend any of that remaining $2150 balance during that month, and pay off your outstanding balance, you’ll be back to your available credit sum of $2500.
It’s really as simple as that.
Observant readers will have noticed that, so far, I’ve used the words “credit limit” rather frequently already. But what is “credit limit” and how does it differ from available credit?
How does available credit and credit limit differ?
Credit limit is the total amount of credit a lender provides a borrower with—and usually the total amount a borrower can spend.
“Usually” is in the above sentence because some credit lenders simply decline further transactions from taking place once the credit limit has been reached and all the available credit is used—this is known as a line of credit being “maxed out.” Other lenders, meanwhile, sometimes allow their borrowers to go over the credit limit to facilitate extra transactions, but this often comes at an additional cost.
The credit limits that are given by lenders differ wildly, and on a case-by-case basis.
For those who are younger and only starting to build a credit score and history, the credit limit they’ll be given will be on the lower end of the scale. John Ulzheimer, a financial expert who’s worked for the like of FICO (the creators of the FICO credit score) and Equifax (one of the major U.S. credit bureaus), said in this CNBC article that:
“Limits on [store and retail credit] cards are notoriously low. And if your first card is a secured card then the limit will likely be very low as well.”
By “low,” Ulzheimer means from around the $50 mark to $2,000, dependent on the borrower’s credit history and score or lack thereof, and the kind of card they’ve been issued. However, if there’s some kind of (positive) credit history and score, credit lenders could provide borrowers who are opening a new account with them a comparatively far higher sum. As CNBC wrote in the same article:
“Data from credit bureau Equifax’s “Credit Trends” report shows that the average credit limit for new “bank card originations” (brand new account openings) has been between $5,000 to $6,000 during 2018 and 2019.”
(To view Equifax’s latest 2020 report, click here.)
For folks who have a healthy, sustained credit history and score—in addition to a more substantial income—they’ll inevitably be given a higher credit limit. Again, credit limits are supplied on an individual basis, but to give you a bit of an idea, Experian data shows that American Baby Boomers have on average a $39,000 credit limit across their credit cards, while Millennials have around $20,000, and Gen Z the lowest (because they’re the youngest of all credit-using generations) at $8,000.
That’s available credit and credit limit both defined. Hopefully you can see where they overlap, but also how the two terms differentiate, too.
Why understanding available credit is so important
Getting to grips with available credit is essential for everyone who has a card with credit on it.
Why?
Because not only will it enable you to make decisions and take actions that’ll benefit you in the short term, but it’ll also set you up for credit success in the long term.
Specifically, fully understanding available credit—and making wise decisions—enables you to:
Remain under the 30% credit utilization threshold
Credit utilization refers to the usage of your available credit, and equates to the percentage of your outstanding balances compared to your credit limits across your credit cards. 90% of U.S. credit decision-makers use the FICO credit score model to suss out whether an individual has a “poor,” “fair,” “good,” “very good,” or “exceptional/excellent” credit score. The better your credit score is, the higher your credit limit will be, which means the more available credit you’ll have in your possession. But there are numerous actions that can stop you from having a positive credit score, and instead cause you to plummet, thereby limiting your available credit. One of these actions concerns using over 30% of your available credit. But if you recognize what available credit is, know how to calculate it, and comprehend that you shouldn’t go above the 30% credit threshold, you’re able to keep below that number and do your overall credit score wonders over time. Check out this tool if you need a little extra help making sure you don’t use more than the stated 30%.
Avoid fees from the lender
As I briefly touched on earlier, using up all your available credit can infer additional charges. If you suddenly have additional charges to pay—on top of everything else, including credit interest—it could lead to a snowball effect where you’re having to use further credit later to pay back those additional charges. But by realizing that available credit needs to be used appropriately and not maxed out each and every month simply because it’s there, you can stay away from unnecessary debt payments.
Consistently pay your monthly bills
Credit is a great way to spread the costs of the bills that we’re charged for each month—from the electricity and gas that fuels our homes to our Netflix and Spotify subscriptions that keep us entertained. But if you’re using available credit like it’s a resource that should be quickly depleted each month, there may not be enough credit to pay those all-important bills—which adversely affects your aforementioned FICO credit score. But grasping how available credit works and how the way you use it impacts both your present self and your future self, you can use available credit in a more conservative manner, ensuring that monthly bill payments get consistently paid on time—which is great news when it comes to your payment history.
Luckily, by reading through the post thus far, you’ve already garnered a solid understanding and appreciation of available credit—and this very section has helped guide you toward using available credit sensibly.
Next up, some insight on how to increase your credit limit and thereby the credit that’s available to you.
How to increase your credit limit (and available credit)
Having a higher credit limit means having a larger sum of total available credit—meaning you’ll be able to use more credit freely all while sticking closer to the 30% credit utilization threshold. In fact, conclusive Experian data from 2020 has shown that people with “very poor” and “fair” credit scores are far more likely to eat into their available credit—they have a 73% and 51% average credit utilization ratio respectively. While those with “very good” and “exceptional” credit scores only use 12.4% and 5.7% of their total credit. So, a greater credit limit is key.
But how can you increase your credit limit, exactly?
The first port of call for many is applying for another credit card. If you can open a second or even a third credit account, this increases your overall credit limit and available credit, and may also help with the spreading of costs. This is commonplace, as the average American has around 4 credit cards each. However, if juggling multiple lines of credit doesn’t sound manageable—and if there’s the potential for using it poorly and putting yourself in debt—it’s best to avoid this path and opt for another.
Another avenue you could potentially go down is requesting a larger credit limit directly from your current credit card lender. If you’ve had a pay rise at work or gotten a higher paying job, it will make applying for a credit line increase more streamlined—with a larger sum being paid to you each month, you’ll have more to pay back credit with. Similarly, if you’ve reached a healthier credit score (i.e. anything on or above “fair”) then your request is more likely to be approved—it shows lenders you’re more responsible with handling credit.
They’re the main ways to increase your credit limit.
But if you’re new to the world of credit and want a strengthened chance of increasing your credit when you ask credit card issuers—in addition to building a solid credit history and score over time—then it’s in your best interest to get accustomed with Grow Credit.
Grow Credit’s Mastercard will help your credit history, score, limit, and available credit!
Photo by Lovefreund
Grow Credit enables U.S. residents to easily build credit over time. By paying off small-scale subscriptions like Amazon Prime, Hulu, and Disney+ through a free and virtual Grow Credit Mastercard, you’re able to establish and then improve your very own credit score incredibly simply.
What’s more is that by using Grow Credit to develop your credit score and history, it will make the later process of gaining a larger credit limit far less complicated, too.
Watch this short explainer video for more on how Grow Credit works.
To apply for the Grow Credit program yourself, all you need is:
A bank account (that’s been open for at least 60 days)
An email address
A phone number
An SSN (social security number)
A physical U.S. address and resident status
A minimum income of $1,200 per month (for at least 2 months)
An account balance of at least $100
And to be age 18+
Meet our requirements? If so, grab your free Grow Credit Mastercard and begin a smoother, more streamlined journey to attaining a great credit status via our iOS and Android apps, or our website.
On top of our free program, we have two premium plans for those serious about taking their credit status to the next level.
The Grow Membership ($4.99/mo) includes:
A $50 monthly spending limit
Access to premium subscriptions
And periodic balance increases (coming soon!)
Meanwhile, the Accelerate Membership ($9.99/mo) includes:
A $150 monthly spending limit
Access to premium subscriptions
The ability to build credit with your cell phone bill
And periodic balance increases (coming soon!)
Grow Credit is just so useful for building a positive credit status from scratch that esteemed publications and sites have praised Grow Credit time and time again.
TechCrunch wrote that Grow Credit is:
“A pretty elegant way to solve a problem that’s a real barrier to entry for a large number of financial services.”
Additionally, creditcard.com said that Grow Credit is:
“A useful tool for climbing the ladder and eventually qualifying for a better card.”
So, what’s the holdup? It’s time to grow with Grow Credit.