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It’s not possible to have too much available credit on your credit cards. Leaving a portion or all of your credit limits on credit cards untapped can actually work in your favor. It signals to prospective lenders that you can maintain a healthy relationship with credit.
Here’s what you need to know when managing a lot of available credit.
» MORE:Can you have too much credit in general?
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Perhaps you've amassed a lot of available credit because credit card issuers keep hiking your credit limits or you've added several credit cards to your portfolio over the years.
While accumulating a lot of credit over time won't hurt your credit scores, applying for too much of it at once will. And, even though credit card issuers may provide a lot of available credit, they don't expect you to use it all. Using your credit card’s credit limits to full capacity can negatively impact your credit utilization ratio, a key factor that affects credit scores.
It’s recommended you don't exceed 30% of your available credit limit to maintain healthy credit scores. You want good credit scores (a FICO score of 690 or higher, for instance) to benefit from lower interest rates on future loans.
Of course, whether or not you're approved for credit in the future is at every lender's own discretion, as they each have their own policies and underwriting criteria. But you can rest easy knowing that the amount of available credit you have doesn't directly factor into your credit scores.
» RELATED: Should you apply for multiple credit cards at the same time?
How much available credit should I have?
There is no ideal, one-size-fits-all, amount of available credit that everyone should have. But a good guideline is to only take on a manageable amount of credit that aligns with your goals.
Enough to back up an emergency fund
If it gives you a sense of security to back up an emergency fund with a lot of available credit, then it’s worth working toward that goal. You can start by requesting a higher credit limit from a credit card issuer, but don't overdo it. Some credit card issuers run a hard inquiry on your credit report which can cause credit scores to temporarily drop.
It may also be important to diversify your credit across different credit card issuers. That way, if one issuer cuts your credit limit, you may still have credit available from another. Note, credit card issuers can lower credit limits at their own discretion, and it’s not uncommon for them to do so during times of economic uncertainty.
But not enough to get you into trouble
Avoid opening too many lines of credit if you’re likely to increase reliance on them or max out credit cards. If that’s the case, only take on a reasonable amount of credit that you can afford to pay back.
» MORE: Credit card limit increases carry risks and rewards
Maintaining a healthy relationship with credit
After gaining a hefty amount of credit, expect a lot of responsibility. You'll have to give your accounts some time and brain space, so don't take on more than you can manage.
Here are some ways to do right by your credit:
Stay on track with payments: On-time payments make up a big percentage of your credit scores, so it’s important to always pay the bill. For your convenience, ask your credit card issuers to change the payment due date to one that you won’t forget. Also, set reminders on your phone or calendar. Or, better yet, automate payments.
Keep accounts open and active: Not using your credit cards can lead issuers to close your accounts. Since the length of your credit history factors into your credit scores, this can have a negative effect. Avoid inactivity with budgeted recurring purchases, even if they're small.
Don’t use more than 30% of available credit: To maintain healthy credit scores, avoid using too much of your available credit.
Don’t apply for too much credit at once: If you’re going to apply for another credit card, wait six months between applications to give credit scores time to bounce back. Get comfortable with paying on time and in full before adding another card.
Review credit card statements often: Frequently look over your credit card statements to review transactions. You want to spot fraudulent purchases or mistakes as early as possible, as they can eventually hurt your credit.
» MORE:7 habits of highly effective credit card users
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 experts say.
As long as you don't use your available credit to run up high balances, a high level of available credit won't hurt your credit. In fact, available credit can improve your credit utilization, which accounts for 30 percent of your credit score.
This means you should take care not to spend more than 30% of your available credit at any given time. For instance, let's say you had a $5,000 monthly credit limit on your credit card. According to the 30% rule, you'd want to be sure you didn't spend more than $1,500 per month, or 30%.
There's no magic amount of credit that a person “should” have. Take as much credit as you're offered, try to keep your credit usage below 30 percent of your available credit and pay off your balances regularly. With responsible use and better credit card habits, you can maintain a good credit score.
Maxing out your credit card can affect your credit utilization ratio. This ratio is a percentage of how much credit you're using versus your total available credit. The Consumer Financial Protection Bureau says to keep your credit utilization ratio below 30%.
If you go over your limit and haven't opted into the over-limit program, your card will be declined. In this case, you will have to provide another method of payment to complete the transaction. Increased interest rate. If you exceed your credit limit, your credit card issuer might apply a penalty APR.
If you're going over 50%, this would be considered a high credit utilisation ratio, and would likely be marked on your credit file. So, if you've just taken out a new credit card, try to keep the amount of credit you're using as low as you realistically can and avoid using the total available credit card balance.
However, multiple accounts may be difficult to track, resulting in missed payments that lower your credit score. You must decide what you can manage and what will make you appear most desirable. Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it.
You can be approved for up to two new credit cards every rolling two-month period. You can be approved for up to three new credit cards every rolling 12-month period. You can be approved for up to four new credit cards every rolling 24-month period.
The golden rule of credit card usage is to do everything you can to pay off your entire balance each month. If you can do this, you won't be charged any interest.
Credit limit is the total amount of credit available to a borrower, including any amount already borrowed. Available credit is the difference between the credit limit and the account balance, or how much you have left to spend before you reach your credit limit.
If you're just starting out, a good credit limit for your first card might be around $1,000. If you have built up a solid credit history, a steady income and a good credit score, your credit limit may increase to $5,000 or $10,000 or more — plenty of credit to ensure you can purchase big ticket items.
How many credit cards is too many or too few? Credit scoring formulas don't punish you for having too many credit accounts, but you can have too few. Credit bureaus suggest that five or more accounts — which can be a mix of cards and loans — is a reasonable number to build toward over time.
By paying your debt shortly after it's charged, you can help prevent your credit utilization rate from rising above the preferred 30% mark and improve your chances of increasing your credit scores. Paying early can also help you avoid late fees and additional interest charges on any balance you would otherwise carry.
If you've got a $1,000 limit and spend $900 a month on your card, a 90% credit utilization ratio could ding your credit score. If you pay it off as your balance hits $300, or three times a month, your credit score shouldn't be hurt by a high ratio.
While spending over your credit limit may provide short-term relief, it can cause long-term financial issues, including fees, debt and damage to your credit score. You should avoid maxing out your card and spending anywhere near your credit limit. Best practice is to try to maintain a low credit utilization rate.
While it is permissible to use 100% of your credit card limit, it is not recommended. Maxing out your credit card can adversely impact your credit score, limiting future borrowing options. Moreover, a high outstanding balance incurs substantial interest, putting you at risk of falling into debt.
While a higher credit limit has many benefits, it also creates the potential to take on more debt, which can negatively affect your credit score if you are unable to manage that debt effectively or make payments on time.
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