When starting your credit history from scratch, rebuilding from a bad financial period in your life, or if you have long established credit history, I get this question all the time, “How much credit is too much”? Or “How many credit cards should I have to have the best credit?” This is often a difficult question to answer, due to the black box nature of Fair Isaac’s FICO credit scoring model.
Debt Ratios
Most people think that having a good payment history is the only driver of your credit score, but this is not the case. One of the biggest factors in determining your score is your available credit to debt ratio. This number is calculated by dividing the amount of credit you are using by the maximum amount of credit given to your by your creditors. The lower your credit to debt ratio, the better that it is for your credit score. In other words, if you have a lot of available credit and a little bit of debt, lenders look at this favorably.
Ideally, your total debt should be at most 30% of your overall credit. For example, if your total available credit is $50,000, you should have no more than $15,000 in total debt.
One important note: mortgages and car loans are not counted in your overall debt ratios.
Acquiring Too Much Credit Too Quickly
Acquiring credit too quickly is also looked upon with disfavor in the credit reporting bureaus. Statistics have shown when a person acquires a lot of credit quickly, they are in danger of maximizing out their credit and incurring a lot of debt overnight.
It’s mostly people without a lot of money who acquire many credit cards quickly. As such, the ability to repay such debt, if acquired, may be impaired.
Having Too Many Credit Cards
Even if you’ve accumulated your credit cards over many years, you are going to see some drop in your score if, say, you have 20 open credit cards accounts. What is the exact dividing line in how many is too many? More than 5 but less than 10? Unfortunately, Fair Isaac is not going to tell me or you. This information is proprietary, as is everything else used to calculate your credit score. (It’s a black box, remember?)
Summary
Fair Issac only gives general guidelines in what it takes to have a great credit score. We’ve gone over all the basic points in this article. Besides having a good paying history, the keys to good credit are:
- Maintain a low debt ratio,
- Never have more than 30% of your total credit in use,
- Don’t have an excessive number of accounts, and
- Do not acquire debt too quickly.
What has been your experience with the impact of your credit card accounts on your credit score? Tell us by leaving a comment!
Marco Angioni II contributed to this article.
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