Credit limit and available credit are two important concepts related to credit cards and borrowing. The credit limit is the maximum amount of credit that a lender or financial institution is willing to extend to a borrower, while the available credit refers to the portion of the credit limit that is currently unused and available for the borrower to use. In other words, the available credit represents the amount of credit that the borrower can still spend before reaching their credit limit. Understanding the difference between these two terms is important for managing one’s credit utilization and avoiding overspending, which can have a negative impact on one’s credit score.
Key points of difference between the credit limit and available credit:
1. Definition:
Credit limit is the maximum amount of credit that a lender or financial institution is willing to extend to a borrower, while available credit is the portion of the credit limit that is unused and available for the borrower to spend.
2. Purpose:
Credit limit serves as a cap on how much credit a borrower can access, while available credit indicates how much of the credit limit is still unused.
3. Impact on credit utilization:
Credit utilization, or the amount of credit used compared to the credit limit, is one of the factors that affects a person’s credit score. By monitoring available credit and using it responsibly, borrowers can keep their credit utilization low and maintain a good credit score.
4. Factors affecting available credit:
The available credit can be impacted by various factors such as payments, new charges, and returns. For example, when a borrower makes a payment, the available credit will increase, but when a charge is added, the available credit will decrease.
5. Importance of monitoring:
It is important to keep track of both the credit limit and the available credit, as it can help in managing credit utilization and avoiding overspending, which can negatively impact the credit score.
Here is a table that summarizes the difference between credit limit and available credit:
Credit Limit |
Available Credit |
|
Definition | Maximum credit amount extended by lender | Unused portion of the credit limit that can be spent by borrower |
Purpose | Serves as a cap on credit access | Indicates unused credit available for borrower to spend |
Impact on credit utilization | Affects credit utilization, which is a factor in credit score | Low credit utilization helps maintain a good credit score |
Factors affecting | May be adjusted by lender based on credit history, payment behavior, etc. | Adjusted regularly based on spending and payments |
Importance of monitoring | Essential for managing credit utilization and avoiding overspending | Helps maintain a good credit score |
Bottom line:
In summary, the credit limit is the maximum amount of credit that a lender is willing to offer, while the available credit is the portion of the credit limit that is unused and can be spent by the borrower. It is important to monitor both credit limit and available credit to effectively manage one’s credit utilization and maintain a good credit score. By keeping track of these numbers and using credit responsibly, borrowers can avoid overspending and stay on top of their finances.
Jyoti is unique blend of expertise, extensive experience, and a genuine passion for credit cards positions him as an exceptionally well-suited and engaging content writer. His profound insights into the Indian credit and banking sectors have empowered him to craft numerous informative and captivating blogs.