Here’s something a lot of people don’t know: Having too many credit cards can
have a negative effect on your credit score, even if you are making your
payments on time.
Here’s why: Lenders compare your income to the credit that’s available to you.
And the more cards you have, the more credit is available to you. So let’s say
you make $60,000 and have 10 credit cards, each with a $5,000 limit. As far as
your creditors are concerned, you have a potential debt of $50,000 with little
hope of repaying it with an income of $60,000. Sure, you’d never dream of
maxing out all your cards; but creditors have to consider that you could.
So how do you know if you have too many credit cards? There’s no fixed number.
Think of it as a sliding scale based on your income and available credit. It’s
a simple equation: If you couldn’t pay off your debt if you maxed out all your
cards, you need to start closing some accounts.
But not so fast…. closing too many cards too quickly can also have a negative
impact on your credit score because creditors look at your debt-to-credit
ratio. For instance, if you had $20,000 in potential credit and carried a
$10,000 balance, you’d be using only 50% of the credit available to you. But if
you closed out an account with a $5,000 credit limit, your debt ($10,000) to
credit ($15,000) ratio would climb to 66%. This is closer to being maxed
out.
The higher this number, the higher of a credit risk you become and this could
result in a lower credit score. The lower your credit score, the higher the
interest rate generally is. Even if you have had problems with your credit
in the past, you can start improving it today. Your most recent credit is the
most important as creditors generally look at a 2-4 year credit history.
And speaking of history, next month marks our 15th anniversary of saving
customers money by helping them pay down their high-interest debt and get to a
better place.
