How Much Available Credit Should I Have on My Credit Card?
Using credit cards can be tempting. Keeping your total available credit at a certain percentage is the first step in proper credit card management.
Contributing Writer at Tally
February 14, 2022
When you open a new credit card account, you'll notice that your card issuer provides you with a credit limit. This is the maximum that you're allowed to spend on the card at any given time. The amount of unused credit that you have is known as your "available credit."
Spending with a credit card can be tempting, but a few principles are worth remembering, such as only using a certain percentage of your credit at any one time. Spending more can impact your credit score and, subsequently, future lending options.
Not only will we answer the question, "How much available credit should I have on my credit card?" we'll also cover topics like credit utilization ratios and the consequences of using too much of your available credit. By the end of this article, you should better understand the things you need to practice for good credit card management.
What is credit utilization?
Before we can answer how much available credit you should have on your credit cards, it's important to understand the concept of credit utilization.
A credit utilization ratio measures your credit usage. It compares how much credit you're using versus your total credit limit. It technically considers any revolving credit accounts you have open. This includes credit cards and lines of credit but doesn’t include fixed-payment lending like mortgages or auto loans.
Let's say, for instance, that you have three credit cards. The credit limits are $5,000, $5,000 and $2,500. You also have a line of credit for $7,500. Your total available credit is $20,000.
Now, let's say that you've borrowed $3,000 against the line of credit, and you have credit card balances of $1,000, $500 and $500. Your total credit usage is $5,000.
If you divide $5,000 by $20,000, you see that your credit utilization ratio is 25%. Your credit utilization ratio isn't directly a part of your credit report, but it ultimately plays a role in determining your credit score.
There are two different types of credit scores: FICO scores and VantageScores.
Your FICO credit score is calculated based on the following factors and weightings:
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
VantageScore doesn't define the exact percentages they use to determine scores, but here is the breakdown of factors and how influential they are:
Total credit usage, balance, and available credit: Extremely influential
Credit mix and experience: Highly influential
Payment history: Moderately influential
Age of credit history: Less influential
New accounts: Less influential
Things like "amounts owed" and "total credit usage" are highly influential when determining your credit score. These are ultimately related to your credit utilization ratio.
How much available credit should I have on my credit cards?
Generally speaking, it's believed that you should aim to keep your credit utilization ratio less than 30%. So, as a rule of thumb, you should aim to have 70% of your credit available at any given time.
There are a couple of things to note with this. First, this doesn’t mean that you should keep your credit card balances at 0%. Some things can happen if you don't use your credit card. Your credit card company may assume that you're not using the card and close the account. This would reduce your total available credit and potentially drive up your credit utilization rate.
Second, your credit card balances are only documented with the credit bureaus on each statement closing date. This is when your credit card issuer sends you a statement that reflects your current balance.
Based on the example above, let's say that your statement closes on the 25th of every month for all three of your credit cards. Your total available credit going into a new billing cycle is $12,500. You make three large purchases. On the 12th of the month, your current balances are $10,500. This is well over the 30% credit utilization benchmark.
However, this information hasn’t been documented or sent to the credit bureaus yet. Knowing this, you pay off $7,000 by the 24th. Your current balance on the 25th is $3,500, yielding a credit utilization ratio of 28%.
In summary, seek to maintain a credit utilization ratio between 1% and 30%. You can technically exceed this during the month as long as those are the credit utilization rates when your billing cycle ends and your statement is issued.
What happens if I use too much of my credit?
If you use too much credit, a few negative things might happen. Below are three scenarios that could reasonably occur if you use too much of your credit.
You're charged interest on your balance
When your billing cycle ends, you'll receive a statement with your balance. You’ll also see a due date and a minimum payment required. If you make the minimum payment by the due date, you'll avoid late fees and penalty APRs, but you'll be charged interest on the outstanding balance. Interest rates can vary depending on your lender, but credit cards tend to have high rates of interest.
Keeping a low credit utilization not only helps your credit score but can also help keep your payments more manageable and reduce the likelihood of taking on credit card debt.
Your credit score decreases
As mentioned above, the amounts you owe and your total credit usage are important factors in determining your credit score. If you use too much of your credit, you risk damaging your credit score. If you're looking to build an excellent credit score, aim to keep your credit utilization rate below 30% while also making sure you are paying not just the minimum required but the entire balance by your due date.
Future lending options are impacted
Your credit score directly determines your ability to secure future lending. When you, as a potential borrower, apply for a new account, a lender will run a hard inquiry on your credit file. The higher the credit score, the more likely you are to be approved and receive the best interest rates.
A poor credit score could prevent you from accessing the best credit cards, like cash back or travel rewards cards. It may cause your interest rates to be higher, costing you thousands of dollars if applied to something like your mortgage.
What can I do to lower my credit usage?
If you're looking to lower your credit usage and increase your amount of available credit, there are two options. You either have to pay down your existing balances or request a credit limit increase. Some lenders will offer higher credit limits if you have a strong payment history and can prove an increase in annual income.
However, if you currently have a high credit utilization ratio and carry balances from month to month, you likely won't be approved for a credit card limit increase. You’ll need to look at other ways to pay down your balances to lower your credit usage. Consider options like:
By paying down your balances, you’ll lower your credit utilization rate.
Manage your credit card debt to improve your personal finances
When you open a new credit account, you’ll receive a "limit" that represents the maximum amount you're allowed to spend at any one time. However, just because this money is accessible doesn’t mean you should use it all. The bottom line: aim to keep your credit usage below 30% on your revolving credit accounts.
If you’re currently using more than that, look for ways to pay down your credit card balances. One such way is with Tally. Tally is a credit card payoff app designed specifically to help you pay down debt quickly with a lower-interest line of credit. With Tally's debt pay-off app, you can work to bring your usage down, pay down debt and potentially improve credit scoring factors with regular, on-time payments.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.