Credit cards are a great financial tool and a powerful resource for building credit. But how much credit you have and how much credit you use both affect your credit score—for better or worse.
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Credit limit vs. available credit: what’s the difference?
To understand how much credit you should have, you need to know two terms:
- Credit limit: Your credit limit is the total amount of money you can spend on a given credit card. Credit limits vary widely between cards, and can be raised periodically through credit limit increases.
- Available credit: This is how much money you can spend right now on a given credit card. It’s calculated by subtracting your current balance (what you owe) and pending charges from your credit limit. For example, if you have a credit limit of $500 and a current balance of $100, your available credit is $400.
What should my credit limit be?
Your credit limit will be determined by your card issuer when you’re approved for a new card. Your credit limit is based on a number of factors, including your:
- Credit score
- Credit history (payment history especially)
- Income
- Employment status
- Debt-to-income ratio
- Security deposit (if you have a secured credit card)
As mentioned, you can qualify for or request a credit limit increase after you’ve been using your card for a number of months, so your initial credit limit on a credit card may change over time.
There’s no set rule for what your credit limit should be on any given card. It needs to be high enough to meet your financial needs and leave you a good amount of available credit throughout the month. But if you’re prone to overspending, you don’t want a credit limit high enough to tempt you into more debt than you can manage.
How does available credit affect your credit score?
Your available credit affects your credit score through your credit utilization rate. Credit utilization is the amount of your available credit that you’re using. In other words, it’s your current balance (across all of your credit cards) divided by your total credit limit (again, across all of your cards).
Here’s the equation for calculating credit utilization:
Total balance ÷ total credit = credit utilization rate
Every major credit scoring model rewards you for having a lower credit utilization rate. This metric determines about 20%–30% of your credit score, making it the second most important scoring factor.
To keep a good utilization rate, you want to be using less than 30% of your total credit (meaning you want 70% or more available credit at all times). In fact, if you can keep your utilization below 10%, meaning that 90% of your credit is still available, that’s even better.
The table shows the average credit utilization rate that people in different credit score ranges have. 1
Average Credit Utilization Rate by Credit Score
| Credit Score Range | FICO Score | Credit Utilization Rate | Available Credit |
|---|---|---|---|
| Bad | 300–579 | 73% | 27% |
| Fair | 580–669 | 51% | 49% |
| Good | 670–739 | 32.6% | 67.4% |
| Very Good | 740–799 | 12.4% | 87.6% |
| Excellent | 800–850 | 5.7% | 94.3 |
How much total credit should I have on all of my cards?
There’s no one right amount of credit that you have to maintain a good credit score, and there’s no set limit to how often you can apply for a credit card. However, the more credit you have, the easier it is to keep your credit utilization low. In that sense, having a high total credit limit across all of your cards (either from having numerous cards or high credit limits) is ideal.
However, that doesn’t mean you should open as many cards as possible to get a better utilization rate. Applying for new cards usually triggers credit checks known as hard inquiries, which temporarily hurt your score, undermining the beneficial effects of boosting your credit limit.
In general, the best strategy is to only open cards that you actually plan on using, and to use them responsibly (meaning you should never make late payments). That way, your card issuer will be willing to give you a high credit limit.
Of course, you should also keep your spending relatively modest. This strategy is the best way to improve your credit score over time.
How much credit should I use?
As mentioned, you should keep your credit utilization rate below 30% (preferably 10%). The amount of credit you can use without reaching this threshold depends on how much total credit you have.
Let’s say you have two credit cards, each of which has a credit limit of $500, for a total of $1,000 credit. You should never let your combined balance on your cards exceed $300 (a 30% ratio), and ideally, you won’t let it exceed $100.
Why you should never max out your credit cards
While sometimes financial emergencies may necessitate using more than 30% of your credit, you should try to avoid maxing out your credit cards at all costs.
Maxing out your cards makes you susceptible to further financial damage, including:
- Over-limit or card decline fees
- Penalty interest rates
- Card cancellation
- Credit score drops
To recap, try to use only a fraction of your credit limit, and keep in mind that the less you use, the better. See the table below for an idea of how much available credit you’d ideally have based on your credit limit.
How much available credit should I have?
| Total credit limit | Available credit (good) | Available credit (excellent) |
|---|---|---|
| $500 | $350 | $450 |
| $1,000 | $700 | $900 |
| $5,000 | $3,500 | $4,500 |
| $10,000 | $7,000 | $9,000 |
Remember that available credit is the amount of money left on a card. So if you have $500 in total to spend, you’d only want to rack up a balance of $150, leaving $350 of available credit.
What to do if you don’t have enough available credit
If your credit utilization rate is high and you’re worried it’s dragging down your credit score, take steps to lower it immediately so your credit doesn’t suffer.
The best ways to increase your available credit and lower your utilization rate are to:
- Pay off your credit card in full each month.
- Pay your credit card bill at the right time, ideally right before your statement closing date (which is roughly 21 days before your due date).
- Use your credit card sparingly and responsibly.
- Call your card issuer and request a credit limit increase.
- Open a new line of credit to increase your total available credit.
- Consolidate your debt or use another means of paying down your current outstanding credit card balances.
- Don’t close credit cards you aren’t using unless you have to.
