You’re planning a big purchase, like a new laptop, and you check your credit card. You discover your credit limit is ₹50,000, but you’ve already spent ₹30,000. This gives you an available credit of ₹20,000, which is the maximum you can spend on your card without exceeding your limit.
Knowing your credit limit helps you avoid unexpected costs and fees. It acts as a protector that stops you from overspending and going into debt. On the other hand, knowing your available credit helps you keep track of how much you can still spend. Both credit limit and available credit are required for maintaining a healthy financial life. A higher credit limit often indicates good financial habits, while a reasonable available credit shows you’re using your credit responsibly.
By understanding credit limits and available credit, you can make better financial decisions. This will help you avoid overspending and maintain a good credit score.
What Do You Mean By Credit Limit?
The credit limit is the maximum amount of money that a lender, like a bank or credit card company, is willing to extend to you on a credit line or credit card. It’s a cap on how much you can borrow or spend using your credit card. For example, if your credit limit is ₹80,000, you can spend up to that amount without facing penalties or needing to repay any outstanding balance. Knowing your credit limit is important because it shows how much money you can spend. You should stay within this limit to avoid overspending and accumulating too much debt.
A cardholder’s credit limit depends on several factors, such as:
- Credit Score: A higher credit score generally results in a higher credit limit. Lenders see you as less of a risk if they see that you have a good history of paying off your debts.
- Income: Lenders also consider your monthly or yearly income. A higher income suggests that you have a better capacity to repay any borrowed amounts.
- Credit Report: Your complete credit history also plays a role. If you have borrowed responsibly in the past, lenders are more likely to give you a higher limit.
- Debt-to-Income Ratio: This ratio represents the percentage of your monthly income that goes toward paying off debt. A low ratio means you are managing your debt well.
What is Available Credit?
Available credit is the amount of credit you have left after accounting for your current balance. If you have a credit card with a limit of ₹50,000 and your current balance is ₹20,000, your available credit is ₹30,000. This means you can make purchases up to ₹30,000 without exceeding your credit limit. It’s important to keep track of your available credit to avoid overspending and accumulating debt.
Knowing how much credit you have is important for managing your money well. Here are some key points to consider:
- Current Spending Impact: Your available credit shows how much you can still spend on that credit line without exceeding your limit. Always check your balance to see how much credit you have available.
- Credit Utilization Ratio: Your credit score is affected by how much credit you’re using compared to your total credit limits on all your cards. This is referred to as your credit utilization ratio. Aim for a ratio below 30% for better chances of credit approval. A lower ratio shows that you use credit responsibly.
- Potential for Charges: If you go over your credit limit, you might have to pay extra fees, and your credit score could take a hit. To keep good standing with creditors, it’s best to stay within your credit limit.
Differences Between Credit Limit and Available Credit
While credit limit and available credit are closely related, they have distinct differences:
- Credit limit is the maximum amount you can borrow, whereas available credit is the portion of that limit that remains unused.
- Credit limit highlights what you are approved to use, while available credit focuses on what you still can spend.
- Exceeding your credit limit can lead to penalties and a drop in your credit score, while maintaining a healthy available credit promotes good credit utilization, highlighting a positive credit history.- Credit limit is the total amount you can borrow, while available credit is how much of that limit is left for you to use.
- Your credit limit stays the same until a lender changes it, but your available credit can change with your spending.
- Credit limit shows the lender’s trust in you, whereas available credit shows how much you’re currently using.
- If you reach your credit limit, you can’t spend more until you pay some of it off. However, you can keep spending as long as you stay within your available credit.
Bottom Line
Both credit limit and available credit are necessary for anyone using credit cards. Knowing your credit limit helps you stay within borrowing boundaries, while being aware of your available credit allows you to manage your purchases.
Both aspects play an important role in maintaining a good credit score. By keeping your spending within your limit and having a low credit utilization ratio, you demonstrate financial responsibility to lenders. This not only helps you avoid unnecessary fees but also builds trust, which can lead to higher credit limits in the future. Knowing your credit limit and available credit helps you make better financial choices.
Read Also-How Banks Determine Credit Limit On Your Credit Card?