How does available credit and credit limit differ?

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The difference between available credit and the credit limit is related to the account balance of a credit card or other debt. The 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, which is how much you have left to spend.

Key points to remember

  • Available credit is the amount of money available, taking into account the current account balance.
  • A credit limit is the total amount that can be borrowed.
  • If all available credit has been used, the credit limit has been reached, the account is at maximum, and the available credit is zero.
  • If the account has reached the credit limit, some credit card companies will allow the account balance to exceed the limit and others will simply decline any new transactions.
  • Most credit card companies charge penalties for accounts with a balance that exceeds the credit limit, but the penalties or charges applied cannot exceed the account amount exceeding the limit.

Available credit vs credit limit

Available credit and credit limit represent the relationship between current purchasing power and total purchasing power. When a borrower uses their line of credit and increases their balance, the available credit decreases.

This means that the credit available to a credit card holder is the amount that is left over when you subtract all of your purchases (and the interest on those charges) from your credit card’s maximum credit limit.

Once the account balance reaches the credit limit, the account has been “at maximum” and the available credit is zero. When your account balance is zero, your available credit and your credit limit are equal.

In general, lenders give high-risk borrowers lower credit limits. Low-risk borrowers who have an excellent credit rating and a great credit history are generally given higher credit limits, which gives them more flexibility when spending.

What Happens When You Reach Your Credit Limit?

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

Most credit card companies charge penalties for accounts with balances above the credit limit, again, provided the borrower consents in writing. When needed, consumers may be tempted to sign whatever document gives them access to the cash they need. However, you cannot be charged an over limit fee if the only reason you are over your limit is due to interest charges or fees. In addition, your card company cannot charge you an over limit fee more than once during a payment cycle.

The Consumer Financial Protection Bureau (CFPB) imposes 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 certain credit limit, a charge of up to $ 27 may apply. The second time a balance exceeds the credit limit within a six month period, a charge of up to $ 38 may apply. However, the penalties or charges applied cannot exceed the amount that the account exceeds the limit.

Some credit card companies will charge a high annual percentage rate (APR) for breach of credit agreement terms, possibly voiding a previously offered low introductory APR.

Individuals who have agreed to accept a charge for exceeding credit limits may change their mind at any time by notifying the lender in writing, but this does not apply to transactions made prior to opting out of the excess charge. limit. Also, the lender is more likely to decline transactions where the account exceeds the credit limit after a borrower has withdrawn.

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