Does Available Credit Affect Your Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness, based on information from their credit reports. This three-digit number, ranging from 300 to 850, helps predict how likely someone is to repay a loan on time. Lenders use credit scores to make decisions on loan approvals, credit card offers, and the interest rates and credit limits they provide. Available credit is the unused portion of your total credit limit.

Defining Available Credit and Credit Utilization

For example, if you have a credit card with a $10,000 limit and you have charged $2,000, your available credit is $8,000. This concept is distinct from your credit limit, which is the maximum amount of credit a lender extends to you. Your credit limit is set by the issuer based on factors like your credit history and income.

Credit utilization is a key concept. This metric represents the percentage of your total available credit that you are using. It is calculated by dividing your total credit used by your total credit available, then multiplying by 100 to get a percentage. For instance, if you have a total of $10,000 in credit limits across all your cards and you have outstanding balances totaling $2,000, your credit utilization is 20%.

This calculation applies to both individual credit accounts and your aggregate credit across all revolving accounts. Even if your overall utilization is low, having one card near its limit could still affect your score. Credit reporting agencies receive updates from card issuers, reflecting the balances from your monthly statements, which are then used in these calculations.

The Impact of Available Credit on Your Score

Credit utilization is an important factor in credit scoring models, such as FICO and VantageScore. It is the second most important factor after payment history, accounting for approximately 30% of your FICO score and 20% of your VantageScore. Lenders view your utilization rate as an indicator of your financial management and potential lending risk.

High utilization suggests that you are relying heavily on credit or are potentially overextended financially, which lenders may interpret as a higher risk of default. Conversely, a low credit utilization ratio indicates responsible credit management and a lower risk profile. This signals to lenders that you are not overly reliant on borrowed funds and are capable of repaying debts.

Industry guidelines recommend keeping your overall credit utilization below 30%. Maintaining a ratio even lower, such as below 10%, can contribute to excellent credit scores. While there isn’t a precise threshold where your score drops, higher utilization consistently correlates with lower credit scores. Credit scoring models consider both your total available credit across all accounts and the utilization on individual accounts.

Strategies for Managing Available Credit

Effectively managing available credit primarily involves controlling your credit utilization ratio to positively influence your credit score. Reducing your outstanding debt is a direct way to lower your utilization. Paying down credit card balances before the billing cycle ends can ensure a lower balance is reported to credit bureaus, which occurs on your statement date.

Making multiple payments throughout the billing cycle, rather than just one large payment at the end, can also help keep your reported utilization low. This strategy is useful if you frequently use a significant portion of your credit limit. Consistent on-time payments are essential, as payment history is the most impactful factor in credit scoring.

Avoid closing old, unused credit accounts, even if they have a zero balance. Closing an account reduces your total available credit, which can inadvertently increase your credit utilization ratio even if your spending habits remain unchanged. Additionally, older accounts contribute positively to the length of your credit history, another factor in credit scoring.

Requesting credit limit increases on existing accounts can also lower your utilization ratio by increasing your total available credit. However, this strategy should be approached with discipline, as the goal is to lower the percentage of used credit, not to increase spending. Ensure you can resist the temptation to spend more when a higher limit is granted. While less impactful than utilization, maintaining a mix of credit types, such as revolving accounts like credit cards and installment loans like mortgages, can also be viewed favorably by scoring models.