What Does Total Available Credit Mean?
Understand a key financial metric vital for your credit health. Learn how to leverage this knowledge for a stronger financial future.
Total available credit is a core concept in personal finance, showing an individual’s borrowing capacity. It indicates the potential credit resources available across various credit accounts. This figure helps both consumers and lenders understand the overall credit extended by financial institutions.
Understanding Total Available Credit
Total available credit is the sum of all credit limits across an individual’s revolving credit accounts. These typically include credit cards, personal lines of credit, and home equity lines of credit (HELOCs). It represents the maximum amount a lender has made available for a borrower to use without applying for new credit. This figure differs from installment loans, such as mortgages or auto loans, which have a fixed amount repaid over a set period.
Revolving credit accounts allow borrowers to use funds up to a specified limit, repay the amount, and then reuse the credit. For instance, a credit card with a $10,000 limit contributes that full amount to your total available credit, regardless of your balance. Total available credit measures potential borrowing power, not the amount currently used. Lenders set these limits based on a borrower’s creditworthiness, income, and debt-to-income ratio.
Calculating Total Available Credit
Determining your total available credit involves compiling the credit limits from all your open revolving credit accounts. List each credit card, personal line of credit, or home equity line of credit you possess. Locate the credit limit assigned to each account, typically found on monthly statements or online banking portals.
Once you have identified the credit limit for every revolving account, add these individual limits together. For example, if you have one credit card with a $7,500 limit, another with a $5,000 limit, and a personal line of credit with a $10,000 limit, your total available credit would be $22,500. This calculation focuses solely on the maximum amount of credit extended to you.
Impact on Your Credit Score
Total available credit indirectly impacts your credit score through credit utilization. Credit utilization, also known as the credit utilization ratio, is the percentage of your total available credit that you are currently using. This ratio is calculated by dividing your total outstanding balances across all revolving accounts by your total available credit. For example, if you have $2,500 in balances on a total available credit of $10,000, your utilization is 25%.
Lenders and credit scoring models, such as FICO and VantageScore, monitor this ratio as it indicates reliance on borrowed funds. A lower credit utilization ratio, generally below 30%, is viewed favorably by lenders. Conversely, a high credit utilization ratio can signal increased financial risk, potentially leading to a lower credit score.
Credit reporting agencies collect this information and incorporate it into their scoring algorithms, impacting approximately 30% of your credit score. A history of low credit utilization can contribute positively to your creditworthiness, potentially enabling access to more favorable loan terms and interest rates. While total available credit itself isn’t a direct scoring factor, its relationship with current balances is a powerful determinant of credit health.
Managing Total Available Credit
Effective management of total available credit involves strategies for maintaining a healthy financial profile. A primary objective is to keep your credit utilization ratio low. This can be achieved by consistently paying down balances on your revolving accounts, ideally in full each month. If paying in full is not feasible, aim to keep your outstanding balances well below your credit limits, generally below the 30% threshold for each account and overall.
Consider carefully before closing older credit accounts. Closing an account reduces your total available credit. This reduction can inadvertently increase your credit utilization ratio if your outstanding balances remain the same, potentially negatively affecting your credit score. Therefore, it is often more beneficial to keep older accounts open, even if unused, as they contribute to a longer credit history and higher total available credit.
Requesting credit limit increases can boost your total available credit and potentially lower your utilization ratio, provided you do not increase your spending. If your credit limit on a card increases from $5,000 to $10,000, but your balance stays at $1,000, your utilization on that card drops from 20% to 10%. However, this strategy requires responsible spending habits to avoid accumulating more debt. Regularly monitoring your credit reports, which you can do annually for free, ensures that your credit limits and balances are reported accurately.