Available credit vs current balance

If you are new to credit cards, there are a lot of terms you should know. Knowing the ins and outs of credit cards can help you better manage your finances. So what’s the difference between available credit vs. current balance? Keep reading to learn credit card terms and how your credit card debt affects your credit score.  

What Is the Difference Between My Available Balance and My Current Balance?

Knowing the difference between your available balance and current balance is critical to start managing your finances successfully. 

Your current balance is the total amount you have spent using your credit card. Suppose you just got a credit card and bought a leather jacket for $300. In that case, your current balance would be $300 because that’s how much money you have spent.

An available balance is the amount of money you have left to spend using your credit card. In other words, the available balance is your credit limit minus your current balance and pending transactions. You can also see your available credit on your online credit account. If the credit card issuer gave you a $1,500 credit card limit, but you have spent $500, then your available balance is $1,000.  

A statement balance is similar to your current balance but wholly different. The statement balance is the amount shown on your monthly credit card statement from charges that have changed from “pending” to “posted.” On the other hand, your current balance is the total amount of money you owe on the credit card. Paying your entire statement balance by the due date ensures you do not have to pay interest charges on your purchases. 

How Do Lenders Decide a Borrower’s Credit Limit?

Suppose you are considering applying for a credit card. In that case, you’re probably curious to know how much money you will get to spend. But how do lenders decide your credit limit?

Financial institutions determine qualification for credit card accounts on your gross annual income and credit history. Individuals with an excellent history of managing their personal finances typically get high credit limits that allow them to spend thousands of dollars. While you may still apply for a credit card with bad credit, you may not get a substantial credit limit. However, you can get a credit limit increase by demonstrating your financial reliability.   

Can I Use My Total Credit Limit?

You can max out your credit card and use the entire credit limit, but that may not be wise. Maxing out your credit card can leave you stuck in a debt spiral that’s hard to escape. Credit card debt is notoriously hard to pay off due to high-interest rates and a required commitment plan. Many consumers end up stuck with a large debt that’s hard to shake off. But sticking to a debt repayment plan, such as the snowball method, can make it easier to pay off credit card debt aggressively.

Can I Get a Credit Limit Increase?

Yes, you can potentially get a credit limit increase! If you have had your credit card for at least a month, you can try asking your credit card issuer for a spending limit increase. If you do not get an increase at this time, then it’s best to wait for 6 to 12 months before asking again. 

Credit card companies typically give automatic credit limit increases to eligible borrowers at least once a year. Suppose you have yet to receive an increase after a few monthly payments. In that case, you can ask for more money if one of the following situations applies to you:   

When You Have Good Credit

Has your credit score improved since you got the credit card? An increased credit score shows that you can manage your money and make good financial decisions. Your recent credit history may prove that you won’t mismanage your credit card account as soon as you get a more substantial balance. 

If your credit score has gone down, you may not get an increase at this time because your financial situation will appear unstable to lenders. Keep in mind that credit card issuers can also decrease credit limits if they think a consumer shows risky financial behavior.  

When You Get a Raise

If you recently got a raise at your place of employment, you may qualify for a higher credit limit on your credit card. When you have more money to spend, you can afford to pay back a higher current balance on a card. The lender may feel confident granting you more spending power knowing you have the financial ability to pay back any large purchases. 

When You Have Excellent Payment History 

Making continuous on-time payments by the end of your billing cycle shows that you are a responsible consumer. The amount of money you pay each month is less important than paying by the due date. Suppose you always pay on time, but you always pay the minimum. Credit card companies will view you favorably and trust you to make a payment—even if it’s small. You could get a credit limit increase with minimum payments. Still, the increased amount may not be substantial unless your credit utilization ratio is low. 

Financial Terms Consumers With Credit Cards Need To Know  

It’s essential for credit card users to know the difference between an available balance and a current balance. But you should know additional financial terms to better understand your credit card’s terms and conditions. 

Annual Percentage Rate

A credit card’s annual percentage rate (APR) is the interest charge you pay for carrying a credit card balance. When a consumer does not pay their current statement balance in full, then interest is charged on the balance amount. If you want to know what your monthly interest rate is on your credit card, divide the APR by 12. For example, a 25% APR divided by 12 equals a 2.0833% monthly interest rate.  

Most credit cards charge different APRs depending on the financial activities of the borrower. For example, these are a few additional APRs you may have to pay for specific actions:

  • Balance Transfer APR – Interest charged for moving debt from one credit card to another credit card. 
  • Cash Advance APR – When you withdraw cash using your credit card, you will have to pay a cash advance APR. 
  • Introductory APR – Promotional interest rate for new credit card holders. Typically the 0% APR only lasts for a short period before switching to the standard rate.    
  • Purchase APR – Interest charge for new purchases. A purchase APR can be a fixed or variable interest rate.
  • Penalty APR – A percentage fee for having a credit card bill more than 60 days late. A penalty APR differs from the late fee but can still hurt your credit.

Balance Transfer

A balance transfer is when you move one credit card balance to another credit card. Transferring a balance can help you save hundreds of dollars if the new credit card has a lower APR. 

Balance transfer cards typically offer an introductory 0% APR that allows you to skip paying interest charges for a short period, usually 6 to 21 months. However, your credit card issuer may charge a balance transfer fee. Balance transfer fees are either a flat fee or a percentage of the debt transferred over. Keep in mind that you may not be able to transfer balances if you have two cards from the same financial institution.

In some instances, it may cost more to transfer credit card debt than to consolidate debt using a loan. Consider using loans with monthly installments, such as personal loans, to pay off high-interest credit cards if you have a lot of debt to transfer.    

Billing Cycle

A billing cycle is a timeframe from one credit card statement to the next. According to the CARD Act, a billing cycle must be at least 21 days, but it can last as long as 45 days. You can view your billing cycle on your monthly statement. 

Cash Advance

A cash advance is when you withdraw cash using your credit card at an ATM. You cannot withdraw the total amount of your credit limit, only a small portion. The amount you can get in cash depends on the credit card issuer. Cash advances can be costly since you have to pay a cash advance fee. A Cash advance fee is typically 5% or $10 per advance (whichever is greater).

Credit Utilization Rate

Credit card utilization is the amount of debt you have compared to your total credit limit. When you apply for a credit card or credit limit increase, the creditor will analyze your credit utilization ratio to determine your ability to manage your finances. 

If your current balance is more than 30% of your credit limit, you have a high credit utilization ratio. A high utilization ratio signifies that you are a financial risk, and your credit score can be negatively affected. Maintaining a low credit card balance can help you build good credit over time!

Minimum Payment

A minimum payment is the lowest amount you can pay at the end of each billing cycle. The amount you have to pay depends on how your credit card company calculates payments. 

The Bottom Line: Available Credit vs. Current Balance

Your current balance is the amount of money you owe for using your credit card, while your available balance is the amount you have left to spend. Knowing exactly how a credit card works and where your money goes can help you improve your finances and build credit! 

25 key terms everyone with a credit card should know│SELECT