Your credit score is one of the most important numbers in your life, affecting your ability to buy a car or be approved for a mortgage. Having credit available is one of the key factors that affect your credit score, but have you ever wondered how much credit is too much credit?
It’s important to understand that credit and debt are different things. If you owe $10,000 on your credit cards, you obviously have that amount of debt. However, if you have a card with an available credit line of $25,000 and don’t use it, you have that amount as potential credit. Having some available credit is a good thing as it shows lenders that you are able to responsibly handle your money. In general, it is a better strategy to have fewer cards and keep the amount you owe at manageable levels, rather than have many cards.
if you have too much credit, perhaps several credit cards and several open loans or lines of credit, it can raise a red flag with the three main credit reporting bureaus. The perception can sometimes be that you aren’t responsible enough to sensibly handle credit, although it can also depend on other factors such as income and length of credit history. It is possible to have multiple lines of credit available not ever use them, and maintain a high credit score, although the temptation to spend that money is there and many people end up using them and then accruing too much debt.
Thirty percent of your FICO credit score is based on credit utilization, meaning whether you are keeping the balance on your credit cards below a certain amount. As a rule of thumb, you should keep the amount owed on your cards under 30 percent of your available credit. Opening too many lines of credit or taking out too many credit cards all at once give the impression that you are in financial difficulties. And of course, the more cards, loans and available credit that you have, the more challenging it is to keep up with everything, especially the payment due dates. Late payments can also impact your credit score.
If you want to establish credit and boost your credit score, a better strategy is to have one card, use it occasionally and pay the bill in full and on time. If you have a credit card or a line of credit that has a high available amount, you can always call your bank or lender and ask them to lower the amount of your available credit. Not only can the lower credit utilization ratio help your credit score, but the lower available amount will make it harder to run up debts that you just can’t pay back.