Have you ever come across the term “available credit”? It sounds like it should be a simple—even obvious—concept, but it can actually be pretty confusing.
Let’s take a moment to explore what “available credit” is, what it means, and why you should pay attention to it.
What is available credit?
The simple definition of available credit is the current amount of money that you can borrow from a revolving charge account, such as a credit card. Your available credit is determined by taking your total credit limit and subtracting your unpaid charges. In addition, you will also need to subtract any pending charges that act as holds on your account.
A pending charge is a charge that’s been requested, but one that hasn’t actually posted to your account yet. Pending charges are very common, and they simply represent a hold placed on funds in your account when you authorized a charge. New charges are typically listed as pending for a day or two until they are fully processed and change to “posted” status. In some situations, a pending charge may be greater than the actual amount of the charge when it is posted.
For example, gas stations will often generate pending charges for the maximum amount of fuel that you can purchase, so that you can’t pump more than you can charge. In addition, restaurants will often generate a pending charge that exceeds your bill, to account for any sized tip you might choose to leave. In each of these instances, you could have a large pending charge that takes away from your available credit.
Your available credit will also be diminished when you have a hold placed on your account, which is also like a pending charge. For example, rental car companies will often place a hold on your account to ensure that they can recover the cost of any potential damage to the car. In addition, hotels will often place a hold of several hundred dollars on your credit card when you check-in, to pay for any charges to your room such for dining or other hotel services. These holds will also eat into your available credit.
It’s also possible that payments you’ve made that have not yet been processed can affect your available credit—even if that payment has been reflected in your balance. If your current balance, credit limit, and available credit don’t match up, it’s probably because you’ve got either a pending charge or pending payment.
Can you exceed your available credit?
It’s somewhat contradictory, but your credit card issuer may approve transactions that exceed your available credit.
Credit card issuers treat these kinds of purchases as temporary increases to your line of credit, and grant them on a case-by-case basis based on your account history and your credit score. In fact, you can contact your card issuer in advance to request approval of a charge that exceeds your credit limit.
However, there are some credit card issuers that will impose an over-the-limit fee, but there aren’t that many.
How your available credit affects you
There are two ways that your available credit can affect you.
The first way is rather simple. If you don’t have enough available credit, then you won’t be able to make a necessary charge to your account (except in situations described above when the card issuer is willing to authorize purchases beyond your available credit). This could be a problem if you anticipate regular charges using up your available credit and approaching your credit limit. Other times, you might need to make an unexpectedly large purchase, and not have the available credit necessary.
The other way that available credit can affect you is through your credit score. One of the major factors that makes up your credit score is your amounts owed, which comprises 30 percent of your FICO score. A large part of this factor is your debt-to-credit ratio, which is the total amount of debt you have, compared to your total amount of all your credit limits. When you have very little available credit, it will mean that you have a high debt-to-credit ratio, which will hurt your credit score.
How to increase your available credit
For most people, it can only help them to have additional available credit, as it will give them more purchasing power while reducing their debt-to-credit ratio for a given amount of debt. However, there are some credit card users who tend to view their available credit as money in their pocket that they are free to spend. For people who think like this, additional available credit can be abused.
For everyone else, there are several ways to increase your available credit. First, you can contact your existing credit card issuers and request a credit line increase. Typically, a card issuer will only consider these requests once an account has been open for a specific period of time, perhaps 12 months. And of course, you are more likely to receive a credit line increase if you have an excellent record of paying your bills on time, and you have a high credit score.
The other way to increase your available credit is to apply for a new account. You can apply for a new credit card account from a card issuer that you already have an account with, or from a different card issuer. Once approved, your new credit limit will be added to your total available credit.
But perhaps the fastest way to increase your available credit is to make a payment to one of your accounts. You don’t even have to wait until your payment is due or even until you’ve received your statement. You can make a payment to your account in any amount, at any time, and it will result in more available credit within a day or two. Making a return also increases your available credit.
When you have a lot of purchases to make on your credit card in a short amount of time, and you have the cash available to cover them, making frequent payments can be an excellent way to maintain sufficient available credit.
Available credit isn’t one of the more challenging personal finance terms, but it does have a few quirks. By understanding exactly what it is, and how to manage it, you can continue to make the most of your credit cards.