Available Credit vs. Credit Limit: What's the Difference?

Credit terms sound interchangeable until the difference costs you something. Available credit and credit limit are a good example.

One is a number the lender sets, the other changes every time you use the card, and the gap between them is what scoring models actually read. Here's what each one means and why it matters.

What's the difference between available credit and credit limit?

Your lender sets your credit limit when you open a card or line of credit, and it stays put unless the lender raises or lowers it. Your available credit is what's left of that limit at any given moment. It drops when you spend and when interest or fees post, and it climbs back when you pay.

Say you open a card with a $2,000 limit and buy something for $100. Your limit is still $2,000. Your available credit is $1,900.

Why available credit matters for your credit score

Available credit by itself isn't a scoring factor. What you're using against it is.

FICO scores credit based on five weighted categories.

Amounts owed covers how much debt you carry in total across your accounts. The piece that carries the most weight inside it is credit utilization, meaning how much of your revolving credit you're using. FICO's position is that lower is better, but there's no ideal ratio.

Here's how to work out yours. Say you have three cards:

• Card 1: $2,000 limit, $1,000 balance
• Card 2: $3,000 limit, $2,000 balance
• Card 3: $1,000 limit, $500 balance

Your total limit is $6,000 and your total balance is $3,500, so your utilization is about 58%. Scoring models look at each card on its own as well as the total, so one maxed-out card can weigh on your score even when the overall number looks reasonable.

You'll see 30% quoted as a target almost everywhere. It's a guideline, not a cutoff built into the model itself. Every few points you bring your number down helps a little more, whether you started at 58% or 35%.

Using a lot of your credit hurts your score because lenders have decades of data that shows people using most of their available credit run into trouble paying it back more often than people who aren't. The score follows that pattern, though it can't know why your balance is high.

Read more >> Pros and Cons of Increasing Your Credit Limit

3 ways to increase your available credit

Raising your available credit lowers your utilization, as long as your balances don't rise to meet it.

1. Pay down existing balances

This is the only one of the three that also reduces what you owe. If you can put more than the minimum toward a balance, you shorten the time you carry it and cut the interest you pay along the way.

2. Ask for a credit limit increase

Some issuers raise limits on their own, but you can also request one. Before you do, ask your issuer whether the request triggers a hard inquiry, because it varies card to card.

An additional hard inquiry usually takes less than five points off a FICO score. And only inquiries from the past 12 months count toward your score, though they stay on your report for two years. If the increase goes through, the new limit may take a billing cycle or two to show up with the bureaus.

3. Open a new credit account

A new account adds its limit to your total. It also adds a hard inquiry and brings down the average age of your accounts.

And a larger total limit makes it easier for a balance to grow before you notice, which puts your utilization back where it started with more interest attached. Balance alerts or autopay catch that early.

Read more >> How to Lower Your Credit Utilization

Bottom line

Your credit limit is the ceiling. Your available credit is what's left under it right now: The limit minus your balance and any pending charges.

The gap between them is what scoring models actually read. Scoring models look at how much of your limit you're using. So a $5,000 limit only helps if you leave most of it alone. And there are two ways to improve that: owe less, or have more credit available to you.

A new account does the second. Kikoff's Credit Account reports your on-time payments to all three credit bureaus, with no hard credit check and plans starting at $5 a month.