Unless you’re an American Express Black Card member, your credit card has a maximum borrowing limit.
So unless you spend at least $250,000 a month a year (That’s all?!), we have borrowing restrictions.
What is a credit limit?
Credit limit is the maximum amount of money you can borrow or charge against a credit card. For example, if your credit card has a ‘limit’ or ‘available credit’ amount of $10,000, you can’t borrow more than the specified amount.
What is credit utilization?
On the other hand, credit utilization is your current credit card debt divided by the total amount of credit that you can access.
Continuing with our earlier example, you have a credit card that can be charged up to $10,000. In addition, let’s say you have another credit card that has a limit of $5,000.
Combined, you have access to $15,000 in credit (Please don’t use all of it!).
Now, if you have current credit card debt of $1,000, your credit utilization is calculated as follows:
$1,000 / $15,000 = 0.067 = 6.7%