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?
Credit cards have a lot of advantages. Be careful, though. The average credit card debt in 2021 is between $5,525 and $8,701 per household. Knowing the difference between a current balance and available credit might save you some green and scrambling to fix a nasty headache.
The current balance is the available balance plus any pending transactions on the account. Understanding a current balance is can be pertinent for both a debit card and a credit card.
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.
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.
If you miss a payment, call the credit card company and ask if they can refund the late fee. They typically will oblige if it isn’t a chronic issue.
To avoid missing a credit card payment, set up automatic payments from your checking account.
Available balance is the amount of money you can spend right now. You can use the cash in your account for purchases and withdrawals since it excludes pending transactions and checks and holds from your account balance.
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.
Credit card companies turn to your credit score to determine your card’s limit. These scores make up 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 versus someone 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.
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.
Available credit refers to how much the borrower has left to spend.
It is the difference between your credit card balance and your credit limit. It will change throughout your billing cycle as you use the card.
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.
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.
Be aware that 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: Do a balance transfer on the highest APR credit card to save the maximum amount of 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.
National Consumer Assistance Plan (NCAP) Optimization
This model can implement specific data suppression measures through the NCAP. Their model accounts for removing public record information, including tax liens, civil judgments, and certain medical collections information from consumer credit files.
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.