Available credit is different than your credit limit. It consists of the amount left to spend on your credit card (or cards) after you subtract the balance, and it is a key factor in determining your FICO credit score. You should try to maintain a high percentage of available credit in order to improve your score and appeal to lenders.
All credit cards have credit limits, and going over them could mean facing some hefty fees. But you should also be aware of your available credit and how it affects your credit score.
You might be surprised to learn that there is an ideal balance to strike between owing money on a credit card and paying it off. Fortunately, if your credit card balance is high and you would like to have more available credit, you have some options.
What does it mean to have available credit?
Available credit is the amount you have left to spend on your credit card after you subtract your current balance from your total credit limit. So if your credit limit is $5,000 and your balance is $1,000, your available credit is $4,000.
Having a lot of available credit reflects well on your credit score, as it looks good to lenders when you can pay down a balance. This will show up in your credit utilization ratio (also called your credit utilization rate).
Credit utilization ratio
The amount you owe on your credit cards accounts for 30% of your FICO credit score. This is the score most used by lenders, so it’s pretty significant. This amount is expressed as a percentage, called the credit utilization ratio.
If you owe $2,000 on a card with a $10,000 limit, your ratio is 20%. The number takes into account all the credit cards you have, though. So if you also have a card with a $5,000 limit and no balance, your ratio becomes 13.3% ($2,000 / $15,000).
The ideal ratio
You might think that the ideal ratio is 0%, and you would be right. But there is a caveat here. You want to use your credit card throughout the month and have a balance on your monthly statement so it’s clear that the account is active. However, you definitely want to pay off the entire balance before you get charged interest, if at all possible.
However, that doesn’t mean it’s OK to have a high credit utilization ratio throughout the month just because you pay it off in full at the end of the month. The high credit utilization ratio can still hurt your credit. The credit bureau Experian recommends staying below 30%, and even below 10%, for the best score. If you’re currently above that rate, try to pay down your balance before using your card again. If your spending habits regularly put you over 30% of your credit limit during the month, consider getting into the habit of making two payments a month.
How to get more available credit
Don’t worry if your available credit is lower than you would like it to be. There are a few ways to increase your available credit and improve your credit score.
Pay down your balance
If you are able to pay down your balance, that will increase your available credit as soon as the payment clears. This is especially helpful if you are close to that 30% utilization rate and even a small payment would get you below it.
However, be aware that if you make a payment to increase your available credit, it may take a few days to post to your account. Don’t use your credit card if you are close to your card’s maximum amount.
If you have a high balance it’s often a good idea to pay it off with a debt consolidation loan. Here is a list of our best debt consolidation personal loans.
Say you owe $1,000 on a credit card with a credit limit of $2,000, and your credit utilization rate is a whopping 50%. But if you can manage to pay $500 on the credit card, your credit utilization rate will go down to 25%.
Ask for a credit limit increase
Another option is to call your credit card issuer and ask for an increase to your credit limit. You might be surprised to find that they can raise your credit limit enough to give you the available credit you need for a better utilization ratio.
Let’s go back to the card with a $2,000 limit and $1,000 balance. You could increase your card’s credit limit to $4,000, giving you $3,000 of available credit instead of $1,000. This would also lower the credit utilization ratio to 25%.
Open a new credit card
Another way to help lower your credit utilization ratio is by opening a new credit card. With two portions of available credit combined, you can easily increase your utilization ratio.
Let’s revisit that $2,000 card one more time. You open another credit card account with a $2,000 limit. Assuming you don’t use it immediately, your available credit would increase to $3,000 out of a total credit limit of $4,000. Your credit utilization ratio would go down to 25%.
Should I close a card I’m not using?
Even if you are not using a card, you might want to keep it open so that you can add the available credit to your overall total. Every card is an opportunity to add available credit and improve your credit scores.
In addition to increasing your available credit, keeping a credit card account open that you’re not currently using could improve your credit history because it increases the average age of your accounts, which is a factor that impacts your score. Although this is not the biggest factor, it’s still important to consider when trying to increase your available credit. However, if you’re paying a high annual fee for a card you don’t get any real benefits from, you may want to consider downgrading to a card without an annual fee with the same company or canceling the account altogether.
- Available credit on a credit card is the credit limit minus your current balance. If you have multiple credit cards, you will add them together to find your total available credit.
- The amount you owe on your credit cards accounts for 30% of your FICO credit score, so it’s important to pay attention to your balances and available credit.
- You can calculate your credit utilization ratio by dividing your current balance by your credit limit. That percentage should be 30% or lower for the best credit scores.
- In order to increase your available credit, you can pay down your card, ask your credit card company for a higher credit limit, or open a new card account.
View Article Sources
- What’s a Credit Inquiry? – Consumer Financial Protection Bureau
- Available Credit: How Important Is My Credit Score? – FICO
- What Is the Ideal Credit Utilization Rate? – SuperMoney
- How to Lower Your Credit Utilization Ratio – SuperMoney
- What Is In Your Credit Score? – SuperMoney
- Credit 101: The Basics of Credit – SuperMoney
- Will Closing Credit Cards I Already Have Increase My Credit Score? – Consumer Financial Protection Bureau