Credit may be always readily available for those searching, and having credit is considered a very good thing these days, but can you have too much of this good thing?
As with most things financial, the answer is not a simple yes or no. The primary issue is in the question: When people think of credit, there are typically two camps – those who understand that credit in and of itself is not inherently bad, and those who equate credit with debt.
The simple question is actually three-fold:
1) Can you have too much debt?
2) Can you have too many lines of credit?
3) Can you have too much available credit?
And to those more direct questions the answers are yes, meh, and no.
Obviously, carrying too much debt can be detrimental. Multiple lines – when handled responsibly – are not inherently bad; likewise, the amount of available credit does not have a negative bearing on your credit score.
Thinking Back To The Basics
These issues need to be discussed within the context of how credit functions and what goes into credit reporting.
Credit functions as a way to illustrate to others the level of financial responsibility of an individual. Each line of credit acts as a snapshot of a larger mosaic, building a composite image of who you are. Therefore, the more images that build the larger picture, the more clear the picture becomes; however, if the images are not clear, the overall picture does not benefit for them being there.
Remember: The most heavily weighted factors when calculating credit scores are payment history and credit utilization. The number of credit accounts or the amount of available credit are not influential; how you use credit influences your credit report.
VantageScore Vice President of Communications and Public Relationship Jeff Richardson commented that there is not a penalty in the VantageScore modeling for “too many” lines of credit; “Closing the additional credit cards is not likely to impact […] one way or other.”
In other words, one or two responsibly used credit lines can be just as effective to build a healthy credit report – while one poorly handled credit line can counteract a handful of properly handled credit lines.
Similarly, the amount of available credit (the sum of each credit line’s credit limit) will not negatively affect a person’s credit score.
Self-Reflection And Multiple Credit Lines
If you decide to have multiple lines of credit, there are a few potential pitfalls. Simply because having multiple accounts or having substantial available credit does not negatively affect your credit score does not mean it is the best option for everyone.
Critically evaluate your spending habits before trying to juggle multiple lines. Look at the most prevalent tendencies that can damage your credit.
- Watch out for paying late: Having multiple lines of credit is only beneficial if they are all handled efficiently. Late payments appear negatively, whether you are juggling multiple lines or just a single line.
- Watch out for using too much of the credit: Keep spending below the spending limit, ideally around 30 percent of available credit.
- Watch out for credit frenzy: Opening too many accounts over a short span of time can have a negative effect. Ten percent of FICO scores comes from credit inquiries. The frequency of opening new lines of credit within a window of time is factored into credit scores because it may be an indicator of financial trouble.
Before extending your credit, be honest with yourself and set yourself up for success. Credit is one of the quickest and easiest ways to ensure financial freedom.
Keys To Success
- Do not apply for every credit card you come across
- Seriously think before requesting/accepting credit limit increases
- Always pay on time
- Always pay at least the minimum due
- Do not overuse available credit
- Stay at or below 30 percent of your total available credit
- Open cards strategically
- Close cards strategically
- Keep an eye on your credit report and resolve any issue that shows up
The bottom line: There may not be such a thing as too much credit, but there is such a thing as too much debt. Remember that credit lines are tools. Your credit score is an indicator of your financial habits and responsibility. Use the tools wisely to build something beautiful; your financial reputation will glow through proper, responsible credit handling.
