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What is a Free Credit Balance?

Alexis W.
Alexis W.

A free credit balance is the amount of available credit left on a revolving or rotating line of credit. In other words, it refers to the amount of remaining buying power an individual has on a given credit card account. The free credit balance is determined by subtracting the amount of money borrowed from the total line of credit offered to the borrower.

There are several situations in which a free credit balance becomes important. First, if a person has a credit card, he must know his free or available balance on that account. Second, if a person has a margin account with a stock trading brokerage firm — in which the brokerage firm lends him money to invest — he must know his free credit balance. Third, if a person has a home equity line of credit, knowing his free or available balance is important. In general, in any situation in which a person is given a maximum amount of money to borrow and in which he can borrow some or all of that money, then he must know his available or free balance to monitor his spending and his access to funds.

Man climbing a rope
Man climbing a rope

When a credit card or other loan is issued, a high credit limit is often imposed. This means the lender who is issuing the loan checks the borrower's credit and makes a determination on just how much it is willing to risk lending to that individual. The high balance is referred to as the "credit limit."

On a revolving loan, such as a credit card or any other type of loan where a borrower doesn't receive the full balance of the loan at one time, he may borrow up to the credit limit. The difference between what he has borrowed and the amount available to him is the free or available credit balance on that account. For example, if a person has a $1,000 US Dollar (USD) line of credit and has spent $500 USD, his free credit balance is equal to $1,000 USD minus $500 USD or $500 USD. If he borrows up to the maximum limit, then he is said to have "maxed out" his cards and he has no credit balance available.

Most experts recommend avoiding maxing out credit cards. The credit score formula created by the Fair Isaac Corporation (FICO) and used in the United States penalizes maxed out credit cards. In fact, only 30 percent of a line of credit should generally be used to achieve an optimal credit score.

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