December 12th, 2017

How Much is Too Much?

It may surprise you to know that there is no magic number of credit cards that can be assigned to everyone.  There are several questions to consider to get your answer.

First, the debt-to-income ratio.  How much debt do you have compared to your income? Lenders calculate this figure when determining whether to lend you money.  The formula is monthly debt payments divided by monthly income times 100.  For example, if your monthly payments are $800 and your monthly income is $2000, your debt-to-income ratio is 40%. This ratio is not great, since you want to be under 36%, but it could be worse.  Often lenders will calculate your ratio as if your credit cards and lines were maxed out.  This is because that potential exists.  So look up your credit limit on each card and do that calculation again.

It may seem strange, but while you work to pay down debt, your ratio will temporarily increase since your debt payment will increase while your income will remain the same.  But the end result will be a lower ratio.

There is also something called a credit utilization score.  This score is figured by dividing your total debt by your total credit limit.  For example, if you owe $3000 and your total limits amount to $5000, your score is 60%.  The ideal score is less than 30%.

Now back to the original question.
• When starting out or trying to rebuild your credit, just start with one card and manage it well.  Pay it on time and pay more than the minimum payment.
• If you’ve accumulated many cards over time, be careful about which ones you close out.
• Never close a card you owe money on.  This will only make matters worse since the delinquency will hit your credit report.
• Also be careful about closing the cards you’ve had the longest since they show your credit history for the longest amount of time.  (But be smart and work to get rid of your high interest rate cards.)
• Closing the only card you have with available credit is also a mistake since you may need it for an emergency. It will also increase your credit utilization score.
• Whenever closing a card call first then send it in writing.  Follow up by checking to be sure it was closed on your credit report.

Category: Understanding Credit

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