Too much credit?

Understanding credit availability and credit scores

Is there too much of a good thing? Some people worry that may be so when it comes to credit. But an abundance of available credit does not hurt your credit score. In fact, it could be a great thing these days. What you should know:

Credit basics The leading credit scoring formulas, FICO and VantageScore, don’t punish people for having too many accounts.

Access to credit ultimately could be a lifeline. The median duration of unemployment was nearly 14 weeks in June, according to the U.S. Bureau of Labor Statistics. But most households don’t have enough emergency savings to get through extended unemployment.

Obviously, you can have too much credit if it would tempt you to spend recklessly. And the more accounts you have, the easier it might be to forget a payment — which can be devastating to your scores — or fail to detect signs of fraud. But that doesn’t mean you should worry about applying for the credit you need in the misguided notion that having too much credit is bad for your scores.

“It’s not about the number of accounts,” says Ethan Dornhelm, FICO’s vice president of scores and predictive analytics. “It’s about how those accounts are handled.”

Proper use Although you can’t have too much credit, you can have too much debt. Having big balances relative to your credit card limits, or a bunch of cards with balances, can definitely hurt your scores.

Credit scoring formulas consider how many of your accounts have balances and how much of your credit limits you’re using, among other factors. The scoring system uses the balances reported by your creditors, which are generally the amounts from your last statement.

Credit-building strategies If you’re trying to polish your credit, try using one or two credit cards and not charging more than 10% of their limits said credit expert John Ulzheimer, who formerly worked for FICO and for Equifax.

If you do use more than a couple of cards, pay the balances off before the statement closing date. That will typically result in a zero balance being reported to the credit bureaus, and that can be good for your scores.

Be careful about canceling unused cards, however. This can hurt your scores, since it reduces your total available credit. If you’re concerned a lender might close an unused card, you can use it occasionally and immediately pay off any charges.

If your credit scores are already high, however, Ulzheimer questions how much effort you should invest in making them higher. Once your scores are over 760 on the commonly used 300-850 scale, you’re getting the best rates and terms lenders offer.