Definition
“Available Credit” refers to the remaining amount of credit that an individual, company, or cardholder can use to make purchases or transactions. It is the difference between their total credit limit and their current outstanding balance. If a person’s credit limit increases, or outstanding debt decreases, their available credit will likewise increase.
Key Takeaways
- Available Credit refers to the amount of credit currently accessible to a credit card holder or borrower. This amount may fluctuate depending on charges, repayments, and other factors affecting the card or loan balance.
- Lenders often consider an individual’s available credit when determining their creditworthiness. Using a large portion of your available credit or maxing out credit cards can lower your credit score and make you seem risky to lenders.
- Effectively managing Available Credit involves keeping a low balance, making timely payments, and not using your full credit limit. This not only helps in building a good credit score but also provides a safety net for emergencies.
Importance
Available Credit is a crucial finance term as it refers to the unused portion of the credit available on a person’s credit card or a line of credit.
It is important because it directly influences a person’s credit score.
Maintaining a high available credit and using less than your credit limit indicates financial discipline and stability, making you a less risky borrower in the eyes of lenders.
It also provides the flexibility necessary to handle unexpected expenses or emergencies.
Furthermore, responsibly managing available credit can lead to better loan terms and lower interest rates when you apply for mortgages, car loans, or other forms of credit.
Explanation
Available credit refers to the remaining borrowing capacity on a credit line or credit card account. It serves as a useful buffer for individuals and businesses, allowing financial flexibility without the need to constantly apply for new loans or credit accounts.
Many use this as an interim solution to manage unexpected costs, fluctuations in income, or short-term financial challenges. Therefore, it offers convenience in managing finances and ensures continuity even in exigencies.
The principal purpose of available credit is to facilitate quick access to funds when needed without going through the usual lengthy approval process that comes with financial loan applications. It’s helpful for day-to-day expenses, emergencies, or large purchases.
Furthermore, the strategic use of available credit can positively influence credit ratings, as credit utilization (how much of your available credit you use) is a significant factor in credit score calculations. However, it’s important to manage it responsibly since high utilization can lead to debt accumulation and negatively impact credit scores.
Examples of Available Credit
Credit Cards: One of the most common examples of available credit is the limit on a credit card. If you have a credit card with a limit of $5,000 and you’ve charged $2,000 on it, you have $3,000 of available credit left to spend.
Home Equity Line of Credit: If a homeowner has a HELOC (Home Equity Line of Credit) of $50,000 and they have used $20,000 to remodel their kitchen, they still have $30,000 of available credit that they can tap into for other expenses or projects.
Business Line of Credit: A business may have a line of credit with a bank for $250,
If they’ve used $50,000 to purchase new equipment, they have $200,000 in available credit to be used for other business expenses or investments.
FAQ Section: Available Credit
What is Available Credit?
Available credit refers to the maximum amount a credit card user or loan borrower can use to make purchases or withdraw cash. It is the total credit limit minus the current balance and any pending transactions or holds.
How is Available Credit calculated?
Available credit is calculated by subtracting the amount you owe on your credit card (your balance) from your total credit limit. So, for example, if your credit limit is $5,000 and your balance is $2,000, your available credit would be $3,000.
Does Available Credit affect my credit score?
Yes. The amount of credit you have available can affect your credit score. Creditors and lenders like to see that you’re not using all of your available credit, and a lower usage rate can benefit your credit score.
What happens if I exceed my Available Credit?
If you exceed your available credit, your credit card issuer may charge you an over-limit fee. Furthermore, doing so might cause your APR to increase or trigger penalties. Also, it may negatively impact your credit score.
How can I increase my Available Credit?
There are several ways to increase your available credit: you can pay off your balances, ask for a credit limit increase from your credit card issuer, or open a new credit card.
Related Entrepreneurship Terms
- Credit Limit
- Outstanding Balance
- Credit Utilization Rate
- Revolving Credit
- Credit Worthiness
Sources for More Information
- Investopedia – A trusted platform for all types of financial terms, including available credit.
- Credit Karma – Offers information on credit scores, reports and insights.
- NerdWallet – Provides financial tools and advice. They have various articles related to credit.
- Experian – One of the leading credit report companies, providing a lot of helpful information on available credit.
