When talking about available credit vs credit limit, the difference between the two is based on the account balance of debts or of a credit card.
What is a credit limit?
A credit limit is the total amount of money that is available for you to borrow, including the amounts that you have already borrowed.
What is available credit?
Available credit is the remaining amount that is left to spend when your account balance is compared to your credit limit. That is, it is the difference between your account balance and the credit limit.
Available credit vs credit limit – what you must know
- Available credit is the total amount of money that is available when the current balance of the account is given.
- A credit limit is the maximum amount of money that you can borrow.
- Credit limit and available credit are the same when no money has been borrowed from the account, and the current account balance is zero.
- The credit limit will be reached when all the available credit has been used. The available credit balance will then be zero.
- If a borrower has a signed agreement with the credit card companies, some of them may allow the credit limit of an account balance to be exceeded, while others will just decline any further transaction once the account’s credit limit has been reached.
A credit limit and an available balance show the relationship between the total spending power and the current spending power. As balances are increased when the borrower gets closer to their credit limit, the total available credit continues to decrease.
Once the account is “maxed out” and it reaches its credit limit, the available credit becomes zero. Meanwhile, if the account balance is zero, then both the credit limit and the available credit are equal.
Available credit vs credit limit: When the limit is reached
There won’t be any more available credit when the credit limit has been reached, the credit card companies will normally decline any subsequent transactions. But if the borrower has an agreement with the card company, some of the credit card companies may allow the borrower to exceed its credit limit by increasing the account balance. The increase in the account balance may sometimes be a result of interest, penalties, fees, or other charges.
Stiff penalties are charged by some credit card companies when the credit limit is exceeded, provided the borrower has a written agreement. Consumers may really be tempted to sign any documents that allow them to have extra cash in times of need. But if the only reason why your credit limit is exceeded is due to fees or interest charges, then it is worth knowing that credit card companies won’t charge you an over-limit fee.
Available credit vs credit limit charges and fees
The Consumer Financial Protection Bureau has mandated the amount that a credit card company is allowed to charge for a credit card account over the credit limits. A charge of up to $25 may be applied the first time a balance exceeds a given credit limit. If the balance is exceeded within a 6 months period, a charge of up to $35 may be applied for the second time. But the fees or penalties that are applied may not exceed the amount that the account is over the limit.
A high annual percentage rate (APR) may be charged as a penalty by some credit card companies if the credit agreement terms are violated, maybe canceling a low-introductory APR that is offered previously.
An individual can opt-out of the over-limit by writing to the credit card company, anytime time after they have agreed to accept over credit limit fees, although this doesn’t apply to transactions that have been made before the opt-out letter is written.
Lenders will also not allow any more over-limit transactions when you have opted out.