Available credit is the amount of money you can currently borrow on your credit card. You can calculate this number by taking your total credit limit (the maximum balance you can borrow at one time) and subtracting your current balance or unpaid charges. For example, if your credit limit rate is $2,000 and your current balance of outstanding charges is $500, then your available credit is $1,500.
If you have a credit card, knowing your available credit limit will help you manage your finances and not make any unnecessary additions to your balance that you might struggle to pay back.
Perhaps even more crucially, however, keeping an eye on your available credit will help your FICO score. One of the significant factors involved in your credit report rating is the ratio of your debt to your available credit. Keeping that ratio below 30% will help lenders see you as a good candidate for a loan.
What Is a Credit Utilization Ratio?
A credit utilization ratio or credit utilization rate is the percentage total of your available credit that you are using. For example, if your credit card’s maximum balance is $10,000 and you have $1,000 of outstanding charges on your account, then you are availing of—or utilizing—10% of your credit.
Because these rates are frequently used in credit scoring models, staying on top of them is essential. This is because banks and financial institutions see this rate as an indication of your overall financial health.
As an example, let’s take two people, Jane and Bob. Jane owes $1,000 and has a credit limit of $5,000. Bob owes $500 on a credit limit of $1,000. Jane’s ratio is 20%, while Bob’s is 50%. Despite owing twice the amount of money, Jane’s bank would see her as a better candidate for other lines of credit because her ratio is superior.
How Much Available Credit Should I Have?
In many ways, the more available credit you have, the better.
First, having available credit means that you can use your credit card in case of emergencies, big purchases, or car rentals. While having an available credit of $0 means your credit card is maxed out, which could result in extra charges or fees. Credit cards have some significant advantages or benefits when used correctly, but pushing them to the max is rarely a good decision.
Second, how you use and manage your available credit contributes to about 30% of your FICO score. As mentioned earlier, this is because it will be used to calculate your debit-credit ratio. Lenders will look at your credit history when evaluating your suitability for a loan, and a credit utilization score of over 30% will negatively affect your credit score.
Because of this, many financial experts suggest that as long as you are paying your credit card balances regularly and keeping your debts below 30% of your available credit, it can be advantageous to accept as much credit as lenders are willing to offer you.
However, it is worth noting that individuals with FICO scores of 800 tend to use, on average, about 7% of their available credit. So, while 30% is the minimum you should aim for, this number will give you an idea of what it takes to hit those high scores.
Finally, your available credit will typically be a reflection of your financial health. If you have bad credit, it is likely that your issuer will give you low credit. Likewise, if you have good credit, expect high credit limits.
How Credit Utilization Affects Your Credit Score
As mentioned above, credit utilization is one of the factors that goes into calculating your credit score. If you are using too much of your available credit, banks or institutions will see this as a sign that you are overextended. In fact, your credit payment history is only slightly more important than your credit utilization when your FICO score is being calculated.
The FICO model looks at your credit utilization in a few ways. First, it examines each credit card account separately. Then, it calculates your overall debit-to-credit ratio. Scoring high in either of these aspects can negatively affect your credit score.
Tips for Keeping Your Credit Utilization Score Low
To manage your credit card utilization score each month, here are some tips:
Set-Up Balance Notifications:
Request that your lender send you balance alerts on your account to be notified if you go over 30%. This will help you act quickly to keep your credit score intact.
Be Smart When You Make Your Payments:
Knowing when your card issuer sends reports to the credit bureau can help you keep your score pristine. Because this information is sent monthly or bi-monthly, you should make sure your balance is not high at the time of the report. Failure to understand these billing cycles can make it appear as if your credit utilization rate is worse than it actually is.
Spread Out Your Charges:
If you have two or more cards, instead of keeping a high balance on one, try to keep the balance under 30% between them all. For example, if you have three cards with a $1,000 limit, but one of them has a balance of $900, this will appear as if you are overextended. However, shifting this $900 between all three will produce a credit ratio of 30%.
Ask Your Lender to Increase Your Credit:
If your credit utilization is very high, it may be useful to ask your lender to increase your credit limit. However, as you will see below, this isn’t always the best course of action for dealing with a high credit utilization ratio.
How to Get a Higher Credit Limit
The best way to get a higher credit limit is to use your card responsibly. Some issuers will increase your limit automatically if they see that you are clearing your balance in an acceptable fashion. For instance, if you want to increase your limit, use your credit card, but don’t max it out and always make sure you settle the balance within the month. This demonstrates to an issuer that you can handle this line of credit.
While automatic increases are common, some credit card issuers will require you to request a credit limit increase. Once you have made this application, your credit card company will review your account and credit history and decide on that basis if you constitute a good risk.
However, you should always examine your reasons for increasing your credit limit. If it’s because you are struggling and overspending, adding more credit or a new credit card is unlikely to solve the problem. Additionally, in some cases, requesting a higher limit will result in your issuer requesting a hard credit report, which can knock about 5 to 10 points off of your credit score.
The Bottom Line
How much available credit you should have comes down to a few simple decisions. Credit cards, when used wisely, can improve your credit score and open you up to some excellent benefits. As well as proving to lenders that you can balance your finances, credit cards are excellent in the case of an emergency and for things like renting a car.
For both of these reasons, keeping your credit utilization ratio below 30% is a must. You need to demonstrate your ability to live within your means and keep this balance available for when you need it. If an emergency comes along—as they do every now and then—having a maxed-out credit card will be of no use.
However, as mentioned earlier, consumers with credit scores of around 800 have credit utilization ratios of about 7%. While you can have a good credit score without a rate as low as 7%, this rate illustrates the kind of financial management that is required for an excellent credit score.
Frequently Asked Questions
Can You Have Too Much Available Credit?
The amount of available credit you have open to you is not one of the factors that make up your FICO score. So, on that basis, having a large amount of available credit will not affect your credit score.
However, while the FICO score is a useful guideline, lenders use their own private calculations when deciding to open a line of credit. So, while having too much available credit may not be a problem for some, other lenders might consider it a negative.
How Many Credit Cards Should You Have?
There is no magic number. Factors such as your personal requirements and lifestyle will influence what the right number of credit cards is for you.
Firstly, for some people with bad credit management, having no credit card might be the best way for them to stay out of trouble.
However, if you want to build a good credit history, getting a credit card and using it responsibly will help to increase your credit score. Even having one credit card will bring a bit of diversity to your credit file, which comprises around 10% of your FICO score.
If you want to keep your credit utilization ratio below 30%, consider spreading your balance over two or more cards. Again, this technique primarily comes down to sound credit management and meeting payment dates.
Is It Good to Have Multiple Credit Cards?
There are a few ways to look at this question, which largely depends on how you use your credit cards. Having multiple credit cards that are maxed out with debt is a bad idea that will hurt your credit score. However, there are specific cases where having more than one card makes sense.
As mentioned above, you can use multiple cards to lower your credit utilization rate and accrue various promotional benefits like reward points and frequent flyer points.
However, it is worth noting that if you are trying to increase your available credit, opening several new accounts might not be the best way to go about things. For one, opening too many credit requests at one time can affect your credit rating.
Additionally, if you are paying interest rates and annual fees on each account, multiple credit cards might not make sense for you. This is because these payments could have an effect on your personal finances and lead to a situation where you become overextended.
How Many Credit Cards Is Too Many?
It’s hard to put an exact number on this, but once again, it comes down to how you use your credit cards more so than how many cards you hold. For the sake of convenience and security, having at least one credit card is sensible.
Outside of that, there are other reasons why you might choose to have an additional card. For many, extra credit cards are used to open up further lines of credit to increase their monthly purchasing power. This, however, is a situation that can spiral out of control for some, leading them to run up an unmanageable—and credit score-destroying—level of debt.
Is It Bad to Have a Lot of Credit Cards with Zero Balance?
No. Because your credit utilization rate contributes to your credit score, having several credit cards with a low or zero balance should help your score. Once again, proper credit management is crucial here.
However, it’s not as simple as just taking out a bunch of cards, leaving them in a drawer, and letting your credit score skyrocket. Keeping the cards active is vital if you don’t want your bank to stop reporting on the card or, in some cases, close it entirely.
There are two ways that an inactive or closed card can affect your credit score. First, depending on how long you’ve had the card, it might make up a large part of your credit history, and removing it will make lenders believe you have a shorter history of paying back loans. Second, suppose you are trying to keep your credit utilization ratio under a specific number. In that case, the loss of one of your lines of credit can increase the average, thus potentially increasing your rate.
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