How Do Available Credit and Credit Limit Differ?

Your available credit and credit limit are not the same thing.

Credit limit is the total amount of credit available to a borrower, including any amount already borrowed. Available credit is the difference between the credit limit and the account balance, or how much you have left to spend before you reach your credit limit.

Available Credit vs. Credit Limit

So what do available credit and credit limit mean? Available credit and credit limit represent the relationship between current spending power and total spending power. As a borrower taps their credit line and increases their balance, their available credit decreases.

Essentially, available credit is the amount of credit you have to use at any given point in time. Your credit limit, on the other hand, is the total amount of credit that your lender extends to you on a particular credit product.

That means the available credit for a credit card holder is the amount left when you subtract all your purchases (and the interest on those charges) from the maximum credit limit on the credit card.

Once the account balance reaches the credit limit, the account has been maxed out and the available credit is zero. When your account balance is zero, your available credit and your credit limit are equal.

What Happens When You Reach the Credit Limit?

If your credit limit is reached and there is no more available credit, then credit card companies will typically decline any further transactions. However, some credit card companies allow borrowers to increase account balances just beyond credit limits, provided that the borrower has agreed to the terms in writing. The increase beyond the credit limit is sometimes a result of charges and sometimes a result of interest, fees, or penalties.

Most credit card companies charge penalties for accounts with balances above the credit limit—again, provided that the borrower agrees to this in writing. In times of need, consumers may be tempted to sign any document that gives them access to needed cash. However, you can’t be charged an over-limit fee if the only reason that you are over your limit is due to interest charges or fees. Also, your card company cannot charge you an over-limit fee more than once in a payment cycle.

The Consumer Financial Protection Bureau (CFPB) mandates the amounts that credit card companies are allowed to charge for credit card accounts over the credit limit.

The first time a balance exceeds a given credit limit, a charge of up to $27 may be applied. The second time a balance exceeds the credit limit within a six-month period, a charge of up to $38 may be applied. However, the penalties or fees applied cannot exceed the amount that the account is over the limit.

Individuals who have agreed to accept fees for exceeding credit limits can change their minds at any time by notifying the lender in writing, but this does not apply to transactions made before opting out of over-limit fees. Also, the lender is more likely to refuse transactions that take an account over the credit limit after a borrower has opted out.

The Bottom Line

Understanding the difference between your credit limit and available credit can help you make financial decisions such as how much to spend or which credit card to get. If you have poor credit history, you may have to start using credit with a lower credit limit, but if you prove that you are a responsible borrower, you will likely see your credit limit increase.