Have you ever been out enjoying the weekend knowing that you have $500 in your account to spend and wake up to a nightmare Monday morning that you are overdrawn and slapped with a $35 overdraft fee? Or that charges on your credit card have been declined?
Knowing the difference between a current balance and available credit might save you some headaches.
Table of Contents
- Your current balance the amount you owe right now, not counting any pending purchases, deposits or payments
- Available credit refers to credit card accounts. It is the amount of money you have left to spend before you hit your credit limit. All pending transactions will be subtracted from your available credit
- Available balance applies to bank accounts for debit card transactions and is the amount of money you can spend before you overdraft your account
- If you exceed your available credit or available balance, you may be charged an overdraft fee or your purchase will be declined
- Always check both your current balance and available credit before you make a large purchase if you’re worried you might exceed your balance or credit limit
Current Balance vs. Available Credit
These two terms sound similar, but knowing the difference could save you an overdraft charge or the embarrassment of having a charge declined.
The Differences at a Glance
|Credit card account||Bank account|
|Current balance||Your credit card current balance is what you owe right now, plus any pending transactions||On bank accounts, current balance is called available balance. It’s still the amount of money you have available to spend plus pending tranactions|
|Available credit or available balance||The amount of money you can spend immediately||The amount of money available for debit card purchases|
|Statement balance||The full amount you owe at the end of the billing cycle. If you pay the bill in full by the due date, you incur no additional charges||The total amount of money that you have in your account at the end of the month.|
Your current balance is the total amount of money or credit you have in your account. However, this money won’t all be available for you to spend. Some of your current balance could include checks that haven’t cleared, direct deposits from your employer that haven’t posted, deposits you made, or pending deductions from automatic payments. These funds will not be available for spending.
Pro tip: Don’t confuse a current balance with a statement balance. A statement balance is the sum of all of a cardholder’s credits and debits during that one billing cycle.
Your current balance is a more accurate real-time view of your account. The balance can change anytime you use your debit card or credit card, but the charges haven’t been reflected as of yet, perhaps because it fell on a weekend or a holiday, or it simply takes a business day or two for the transaction to reflect.
This also means that if a business, like a hotel, places a hold on your account for incidental charges, that money will be added to your current balance, even though you haven’t technically spent it.
Available credit is the difference between your current balance and your credit limit. It will not include pending transactions and checks and holds from your current balance. It is the amount of money (or credit) in your account for purchases and withdrawals.
Pro tip: Any time you deposit a check, the bank may hold a portion of the money until the check has been verified. This can vary by bank. Most financial institutions only hold funds if the check is for an unusually large amount, from a suspicious account or you’re a new customer to the bank.
Think of it as your credit limit minus your total transactions (including the ones that haven’t yet cleared your account) equals available credit.
For example, if you’ve used your credit card to make a purchase, it may show up as pending in your account for one to two business days until the purchase officially posts to your account. At this point, your current balance won’t reflect this purchase. But the credit card company is assuming that the transaction will go through, so that money will not be available for you to spend.
Pro tip: Think about when you stay at a hotel. The desk agent swipes your credit card for incidentals. To the bank or credit card company, it looks like you’ve made a purchase and the money is removed from your available credit. When you check out, if you haven’t made any purchases during your stay, the hold from those funds is released and they will once again be reflected in your available credit. However, that charge will never be reflected in your current balance.
Before you make a purchase or set up a payment, check your available funds. If your new transaction pushes you past your available credit, you could be charged an overdraft fee, even if the transaction never moves beyond “pending.”
For example, if your credit limit is $2,000 and you use your credit card to buy a $500 gaming system and pay for your $60 LinkedIn subscription, your available credit will be $1,440.
Though available credit and available balance sound the same, there is one key difference: Current balance applies to credit card accounts and available balance applies to bank accounts. Your available balance is the amount of money you have to spend before you overdraft your account. This includes pending transactions.
Think of it as current balance minus pending transactions equals available balance.
For example, if you’ve purchased an item with your debit card, the purchase may appear as pending in your account for one to two business days. Your current balance won’t reflect this purchase until it has been cleared by your bank. But the bank is also assuming that the transaction will go through, so that money will not be available for you to spend.
Other Important Billing Terms
There are a few other key terms that are important to understand.
Credit Card Statement Balance
The credit card statement balance is what you owe at the end of your billing cycle. If you pay your entire credit card bill in full by the due date, you won’t pay any interest charges. If you don’t make the minimum payment, you’ll pay a late fee, and your interest rate could increase.
Pro tip: If you miss a payment, call the credit card company and ask if they can refund the late fee. They typically will oblige if if you’re a first-time offender.
To avoid missing a credit card payment, set up automatic payments from your checking account.
A credit limit is the maximum amount of credit a credit card issuer has approved for you to use.
The lender gives you a credit limit when you’re approved for a credit card. It’s the total amount you can spend on that card. As you use your card, your available credit will change. Your credit limit will not vary.
Pro tip: Credit card companies turn to your credit score to determine your card’s limit. These scores are based on payment history, credit utilization, length of credit history, credit mix, and recent inquiries. All these factors will impact your new card limit. Lenders will give high-risk borrowers lower credit limits compared to applicants with good credit.
Revolving credit is an open-ended account like a credit card, home equity line of credit (HELOC), and personal lines of credit. You can use it as you see fit.
Revolving credit allows you to borrow continuously up to a specific limit. There will be a set limit on this, and as you make a purchase, you will have less credit. But when you make a payment, the available credit increases.
Pro tip: These accounts don’t have an end date, and as long as it is open and in good standing, you can continue to use them.
Credit Card Cash Advance
A credit card cash advance is as convenient as using your credit card like a debit card, except the money does not come out of your bank account but out of your credit card. It has a capped cash advance limit typically between 20% to 50% of your total spending limit.
Your credit card has a $5,000 limit, and your cash advance limit will likely be less than $2,500. The cap rates will vary with each financial institution.
Pro tip: Credit card cash advances come with cash advance fees and higher interest rates than your card charges for purchases.
Credit Card Balance Transfer
Credit card balance transfers move one outstanding debt from one credit card to another. The lender charges a fee, typically 3%, and some of the best credit cards offer a 0% introductory rate to help with debt consolidation.
You can save a ton of money by doing a balance transfer which drastically reduces the interest rate even when there is a fee. Credit card companies typically allow 75% of the credit limit to be used up by a balance transfer.
Pro tip: If you’re transferring balances to a new credit card, start by transferring the balances with the highest interest rates. Then move on to the card with the next-highest balance. Repeat this process until either all of your debts are on the new card, or your new card is near the credit limit. Starting with the highest-interest-rate debts will save you the most money.
A credit score predicts your creditworthiness and how likely you will promptly pay back a loan. Oddly enough, your credit score won’t start at zero. Typically, people don’t get a score until a lender or another entity requests their credit report to assess their creditworthiness. This usually happens when someone takes out student loans or applies for their first credit card. The lowest possible score is actually 300, but you won’t start with a score that low unless you’ve been late with payments or have established a pattern of overspending.
Here are a couple of models lenders use to assess your risk.
These scores were created by the Fair Isaac Corporation (FICO), which uses the following factors to determine an individual’s score:
- Payment history: This includes late payments, on-time payments, accounts in collections, foreclosures, and bankruptcies. It makes up 30% of the score.
- Credit history length: This focuses on the age of each credit card or loan account. It accounts for 15%.
- Credit utilization ratio: This refers to how much of their available credit a person is using, also known as a debt-to-income ratio. Credit utilization accounts for 30% of the overall score. The recommended credit utilization is below 30%.
- Credit mix: This refers to the different types of credit or accounts a person has, such as open lines of credit, installment loans, mortgages, credit cards, and the like. It makes up 10% of the score.
- Most recent credit applications or hard inquiries: 10% of the score is based on how many current loan or credit card applications a person has had. Hard questions will have a more significant impact on your credit score.
- Derogatory marks: Although not percentage-based, bankruptcies, accounts in collections, and foreclosures all hurt the overall score. Bankruptcy can plummet a score of 700 or above by at least 200 points. If your score is lower than 680, you can lose between 130 and 150 points. And these derogatory marks can stay on your credit history for up to seven years.
This company analyzes data supplied by the three major credit reporting companies — Experian, Equifax and TransUnion.
Its modeling techniques are based on:
- Trended credit data: their model reflects changes in credit behaviors over time versus relying on static, individual credit-history records.
Machine learning uses these advanced algorithms to develop credit scorecards for consumers with dormant credit histories – those with no update to their credit file in the previous six months.
Want to know more about other popular credit card terms? Check out this video:
The Bottom Line
Understanding the difference between a credit card’s current balance, its available balance, and a statement balance can help you manage your credit cards and your credit scores more effectively.
Remember: an available credit balance is what you can spend now, minus all the pending transactions and holds. A current balance is the total of all charges. The current balance includes pending credit and payments on your account, as well as the interest finance charges.
You can order one online from each of the three major credit bureaus at Annualcreditreport.com from the Federal Trade Commission. You can also place an order over the phone at 977-322-8228. You will need to provide your name, address, Social Security number, and date of birth to verify your identity.
Credit card issuers charge annual fees to recoup all of the rewards and bonuses that give you access to all the rewards, perks, and benefits that come with the card.
Some credit cards are worth paying an annual fee because of the perks and bonuses you receive. To know if it’s worth it to pay a yearly fee, you need to ask yourself how responsible are you with managing a credit card. What type of rewards are they offering, and are they relevant to you? Do you need to change your lifestyle to take advantage of the perks, and lastly, will you be getting back more value for paying the annual fee?
The main difference between secured and unsecured credit cards is that secured cards require you to send the card issuer a refundable deposit when you open an account. Your available credit limit will usually match your deposit amount, so if you deposit $500, you’ll have a $500 limit.
It is a good tool for building credit, especially for applicants with poor credit, limited credit, or no credit. With responsible use, it will eventually boost your credit score enough to qualify for an unsecured card that won’t require a deposit.