Can Available Credit on Charge Cards Be Liquid Assets?

Image Credit: Westend61/Westend61/GettyImages

The available credit on your charge card isn't a liquid asset or even an asset of any type, although it can increase your ability to make purchases. In accounting terms, ​assets are what you own, while liabilities are what you owe.​ ​Liquidity​ in general is the ability to pay bills. Liquid assets are those that are easily convertible to cash, such as money market accounts and savings accounts.

Advertisement

Liquidity and Charge Cards

Video of the Day

Charge cards increase your ability to spend money -- your liquidity -- regardless of how much cash or other liquid assets you have. ​The liquidity of a charge card or credit card is the available credit.

Advertisement

Video of the Day

For example, if you have a $5,000 line of credit on your card and no charges, the liquidity of the card is $5,000. When you charge $1,500, the liquidity of your charge card becomes $5,000 minus $1,500, or $3,500. Once you pay back the $1,500, the liquidity of the account returns to the original $5,000.

Advertisement

Assets and Liabilities

Like the balance sheet of a business, your personal balance sheet lists your assets and your liabilities. Subtract your liabilities from your assets to get your net worth.

Until you access a charge card line of credit, it doesn't show up on your balance sheet at all. Once you use your card, however, ​the amount you've spent becomes a debt​. This debt is a liability on your balance sheet and reduces your total net worth. Any type of credit card or line of credit operates the same way -- for example, a home equity line of credit.

Advertisement

If you use a line of credit to purchase liquid assets, such as traveler's checks, your net worth doesn't increase. Even though you've gained liquid assets, the debt you've incurred cancels it out on the liability portion of your balance sheet.

Advertisement

Warning

Your net worth actually goes down if you pay fees and interest to purchase liquid assets with credit.

Charge Cards and Credit Cards

Many people use the terms "charge card" and "credit card" synonymously, but they aren't exactly the same, according to Bankrate. A charge card requires you to pay off the entire debt every month, while a credit card allows you to carry over a balance. That's why a credit card is called a ​revolving account​: It has a fluctuating credit line, depending on how much debt is outstanding.

Advertisement

Actual charge cards are rare,​ and many have changed to revolving credit cards. Even American Express, the major remaining charge card issuer, allows time payments for some card holders, Bankrate reports.

Advertisement

Advertisement