Credit 101

Can You Have Too Much Credit?

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“Too much of a good thing can be wonderful,” said film star Mae West. But what about too much credit? Is having a lot of credit a wonderful thing as well?

When most people think about having too much credit, they are thinking of one of three things:

  1. Too much debt
  2. Too many accounts
  3. Too much available credit

There are a couple of different ways to look at each of those items. The first, of course, is how that factor will be considered when a credit score is calculated. Will it help or hurt your credit score? The other is how a lender might view that individual factor. Remember, lenders can supplement scores with their own standards. When you get a mortgage loan, for example, the lender will likely look at your credit scores and your debt-to-income ratios.

Let’s look at each of those three factors a little more closely.

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Too Much Debt

Yes, you can have too much debt, but how much is too much depends on the type of debt and who’s asking the question. According to FICO, the debt you carry makes up about 30% of your score. That category includes things like the amount you owe on specific types of accounts, the number of accounts with balances, the proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts — often referred to as “utilization”), and the proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans.) If your curious about how your debt is affecting your credit score, Credit.com’s Credit Report Card will show you for free.

While that sounds like a mouthful, the bottom line is that paying off debt doesn’t hurt your scores and can save you money in interest. Since credit cards often carry higher interest rates than installment loans like auto, mortgage, or student loans, paying your credit cards off can improve your cash flow and may even help your credit scores.

What about students who graduate with $25,000 or more in student loan debt? Will that hurt their scores?  “No,” says Barry Paperno, a credit industry veteran and Credit.com’s Community Director. (He’s talking about FICO scores in particular here.) “While the amount of revolving debt (credit cards, for example) figures very prominently in credit scoring, the same cannot be said for installment debt.  How you pay and the length of time you’ve had an installment loan can strongly impact the score, but the amount you owe does not — as long as it’s being paid on time.”

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In addition, an individual lender may look at your debt-to-income ratios and either decline your application or charge more if your monthly debt payments eat up too much of your monthly income. (Credit reports don’t provide reliable income information, so debt-to-income ratios aren’t included in credit scores.)

Free Tool: Credit Report CardToo Many Accounts

Three auto loans? Seven credit cards? Four mortgages? Eight student loans? None of these are completely unrealistic scenarios these days. A household where Mom, Dad and one of the kids has a car may easily have three car loans. Someone who bought a rental property during the real estate boom could have four mortgages: two on the home they live in and two on their rental property. And recent college grads may have a half dozen or more student loans.

But how many is too many? If there is an optimal number, you’re never going to know what it is since it is part of a sophisticated and proprietary algorithm. And even if you had a specific number of accounts to shoot for, you would still be stuck with the accounts you have on your report since closing accounts doesn’t make them disappear.

[Related Article: 3 Ways to Boost Your Credit Score by Labor Day]

“While not a heavily weighted part of scoring, there are ‘optimal’ numbers of accounts of varying types (revolving, installment, etc.) the scoring formula looks for, based on your overall credit profile,” says Paperno. When above or below such optimal numbers of accounts, you can lose a few points off your score.  These scoring factors do not, however, take into consideration whether an account is open or closed — only that they appear on the credit report.

Bottom line, this is one of those things that’s just not worth getting stressed about. If you have a lot of accounts already, lay low for a while and don’t open more unless you really need the loan (a new auto loan so you can replace your clunker, for example, or a low-rate personal loan to pay off a high-rate credit card). In the scheme of things, how you manage your payments on your accounts is the most important factor, and well within your control.

Too Much Available Credit

This is one of the questions we get all the time at Credit.com. Consumers wonder if they should close some of their credit cards because their total credit limits are so high. They worry that lenders must see that as risky: after all, if they decided to suddenly use all that credit they could really get into trouble.

“No, there’s nothing about having a lot of credit available that can hurt your score,” says Paperno. “In fact, all other things being equal, more revolving credit availability can, for some, mean a lower credit utilization ratio (balances compared to credit limits), which can actually help the credit score.”

So if your credit card issuers have been especially generous with your credit limits, don’t worry that those high limits will tank your scores.

Want proof that you can have a lot of credit and a great score? Read about Scott Bilker who has 50+ credit cards and a great credit score.

[Credit Cards: Research and compare credit cards at Credit.com]

For more Credit 101, check out these posts:

Image: Andres Rueda, via Flickr

 

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  • http://www.iva-service.co.uk/news/ Andrew Liberty

    Really good post Gerri. It’s often a question that many of our clients ask.

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  • Maria

    Thank you! Really good .

  • lou

    There isn’t any rhyme or reason to FICO scores. I never miss a credit card payment, always pay it off, all other bills are paid on time. But when I went to get a mortgage, there were three different scores from 3 different companies. One said I owed too much on credit cards. This was not even true. And it was less than 10% of the available limit on the cards. My scores should have been nearly perfect.

    The companies who do this credit scoring keep getting dinged by federal investigators. If you ask for explanations, the company gives you nothing that makes any sense. I think they are using foreign workers in other countries whose english is poor or else they are paying minimum wage to workers with minimum intelligence.

    This whole system is flawed.

    • Gerri Detweiler

      Lou –

      I am curious, how far off were the different scores? Would you mind sharing what the three scores were? (I assume this was on the mortgage credit report the loan officer pulled for you?)

      Gerri

      • lou

        I would have to rummage around in boxes to find the paperwork on this mortgage, so will just have to guess instead. One was around 750, another 780, another about 820. So, obviously the same information is being juggled different ways, and what should have been all higher scores was not.

        • Gerri Detweiler

          You’re right – those are large differences! Fortunately your middle score (the one they likely used) is very strong so hopefully you got a great rate, no? But it would be interesting to compare the reports and see if it’s due to the information in the reports or the score calculations…

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  • Blanco I Santiago

    Yes, I have and back in 09 I losto my job and didn’t pay no body and I’m talking about 4 credit cards and 2 private student loan a total of $55,000 all charged off thanks to credit one bank and capital one bank to give me the opportunity to re-build my credit history so I can be al most an track and I had the 4 credit card a mean Visa, MasterCard, Discover and American Express but the error was owed debt in all 4 credit and didn’t was control in what I was doing of what I was buying if I be able to repay back and I had one debt above each other for many years…

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  • http://www.credit.com/ Credit.com Credit Experts

    Nikki — The reason no one can explain the rating level Z is because it’s not something that’s associated with your credit report or score. It’s most likely an internal rating system developed by AT&T and unfortunately, they’re the only ones that would be able to explain their internal rating system.

    Having said this, if you were denied service based on your credit report, they’d have to notify you in writing to identify which credit report they used to make that decision. These notices are often referred to as “adverse action notices” and Gerri explains them quite well in another article… here’s an excerpt:

    “Under the federal Fair Credit Reporting Act, you are entitled to a free copy of your credit report if it is used by a lender, employer, landlord, insurer or other business to take “adverse action” against you. Adverse action is an action that is unfavorable to you. It can include turning you down for credit, insurance or employment; not giving you the best available rate on credit or insurance; requiring you to place a larger deposit when you rent an apartment or get a cell phone plan; or requiring a cosigner on a lease, for example.  Your credit report doesn’t have to be the primary factor in the adverse action decision; if it played a role at all you are entitled to a disclosure at no cost.”

    You can read the full article here but in this case, AT&T is the only one that can tell you what their rating of “level Z” actually means.

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