How Much Available Credit Should You Have?

Last updated Mar. 4, 2025 by Charles Zemub

In the world of personal finance, understanding credit is pivotal. Whether it’s for managing your daily expenses or planning for the future, the role of available credit in your financial life cannot be overstated. From improving your credit score to providing a financial safety net, understanding how much available credit you should have is crucial. This article explores key aspects of available credit, offering insights into how to optimally manage it for financial success.

Understanding Available Credit

Available credit refers to the amount of credit you can still use on your revolving credit accounts, such as credit cards. It’s the difference between your current balance and your credit limit. This figure is crucial for credit utilization, a significant factor in calculating your credit score. Your goals and financial situation should guide how much available credit you aim to have.

The Importance of Credit Utilization

A major component of your credit score is your credit utilization ratio, which is calculated by dividing your total outstanding credit balances by your total credit limits. Ideally, experts recommend keeping this ratio below 30% to maintain a healthy credit score. Therefore, higher available credit can be beneficial as it helps keep your utilization ratio low, assuming your spending remains stable.

Benefits of Having High Available Credit

1. Improves Credit Score: As previously mentioned, a lower utilization ratio, which is achieved by having higher available credit, can significantly improve your credit score.

2. Emergency Financial Cushion: A high level of available credit can serve as a buffer during emergencies when immediate cash isn’t readily available.

3. Enhanced Loan Approval Chances: Lenders often perceive individuals with a good credit score and low credit utilization as low-risk borrowers, enhancing your chances of getting approved for loans at favorable terms.

Risks of Having High Available Credit

1. Potential for Over-spending: The temptation to spend beyond your means can be stronger with greater available credit, leading to potential debt issues.

2. Higher Debt if Mismanaged: Incorrect managing of available credit can lead to high-interest debt, which can spiral out of control if not addressed promptly.

Finding the Balance

Determining the right amount of available credit requires introspection and understanding of your financial habits and goals.

1. Assess Your Financial Objectives: Understand why you need available credit. Is it for building credit, emergencies, or planned purchases?

2. Evaluate Your Spending Habits: Are you a disciplined spender, or do you tend to overspend? Your awareness of this can guide your control over available credit.

3. Calculate Your Monthly Spending: Understand your monthly expenditures and consider how much credit you truly need to cover any immediate financial needs.

Recommendations for Managing Available Credit

• Regularly Monitor Your Credit Reports: Staying informed about your credit utilization and overall credit profile can help you make timely adjustments.

• Increase Your Credit Limits Cautiously: Requesting credit limit increases on existing accounts can be beneficial, but it should be done cautiously and strategically.

• Maintain Low Balances: Aim to pay your credit card balances in full each month to keep your credit utilization low.

• Limit Number of Credit Accounts: Opening too many accounts can dilute your average account age, potentially impacting your score.

Setting a Personal Standard

Setting a personal standard for available credit begins with understanding your own comfort level with debt and financial risk. For some, a higher line of available credit offers security and convenience. For others, it may be a source of temptation and anxiety.

Consider the financial conditions facing you, including the stability of your income, current expenses, and your long-term financial goals. By aligning these factors with your available credit, you can create a credit profile that supports rather than hinders your financial well-being.

Conclusion

Available credit is a powerful tool when used wisely. Striking a balance that safeguards your financial health while allowing flexibility is essential. Regularly reassess your needs and circumstances to maintain this balance, and consider consulting financial advisors for tailored advice.

FAQs

What is considered a good level of available credit?

A good level of available credit typically keeps your credit utilization ratio below 30%. This level varies based on personal financial circumstances and objectives.

How often should I review my available credit levels?

Review your credit reports at least once a year. However, if your financial situation changes significantly, consider reviewing it more frequently.

Is having too much available credit a bad thing?

While having more available credit can lower your utilization ratio and improve your credit score, it can also lead to potential overspending. The key is to manage it responsibly.

Can I increase my available credit without applying for a new card?

Yes, you can request a credit limit increase on your existing credit cards. This can increase your available credit without needing to open a new account.

Will closing a credit card affect my available credit?

Closing a credit card will decrease your total available credit and can increase your credit utilization ratio, potentially impacting your credit score. Consider this before making any changes.