I’ll say it again. Your “available credit” does not equal your bank balance. One more time just in case you weren’t paying attention the first time. Your “available credit” does not equal your bank balance! In fact, whatever you spend on your credit cards goes against your bank balance. Too many people see the words “available credit” and assume it’s OK to utilize that available credit. In addition, just because a credit card company has deemed it appropriate to lend you this money, it’s no guarantee that you have the financial means to pay it back. Let’s take a deeper look at “available credit”, “underwriting” and the credit habits that will get you in hot water faster than you can say “minimum payment”.
We all have wants and needs. There is nothing wrong with that and ultimately our wants and needs don’t predetermine whether or not we end up in credit trouble. It’s how we view and deal with those wants and needs that dictate credit health and credit misfortune. Firstly, we should always take care of our needs first and out wants last. Your credit card is the proverbial “belt and suspenders” just in case you run into trouble and need to make an unplanned purchase. Let’s imagine we are walking through the desert with our trusted horse. Our horse is carrying 2 large bags of water. One should be enough to get us through the desert, but we have a backup bag just in case we run into trouble. Our backup bag of water is our “available credit”. I think we can all agree that it would be silly to use our extra water to give ourselves a bath just because we felt dirty. Even if we were at the end of our desert journey, this would be irrational as we would soon be heading into the desert again and we would need to fill our water bags and water, in this instance, is a scarce commodity.
Now let’s talk about credit limits and underwriting. Underwriting is simply the name given to the process that lenders use to determine credit worthiness and set credit limits based on your debt to income ratio. Your debt to income ratio is exactly as it sounds. It’s simply the ratio between how much debt you have and your financial obligations (payments), and your income. The goal is to determine the amount of discretionary income you have available to pay back whatever they lend you. That, as well as your financial track record, is how lenders determine your credit limits. Keep in mind that this is like looking at your life through a keyhole. In other words, the data that underwriters have may or may not be the whole story. The bottom line, just because your credit card company gives you a $10,000 credit line, does not mean you can really afford to pay that debt back. This is especially true if you fall onto hard times.
So, what’s the takeaway here? Your “available credit” does not factor into your income or spending power. It’s there just in case you need it and having “available credit” is a good feeling that may help you sleep at night. On the other hand, if you turn your available credit into a debt or financial obligation, it just becomes another monkey on your back. If you change the way you view “available credit” then you will enjoy better credit health, less financial stress and ultimately a better life.