Promotional credit card offers are very tempting. It’s not easy to turn down a card that comes with thousands of free airline miles, or a low APR. Even if you tell yourself you don’t plan to use the card, it’s good to know that it’s available, just in case. However, when it comes to adding to the collection of plastic in your wallet, you need to understand the impact
that all of this available credit will have on your borrowing ability.
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Let’s say you have a choice between either two cards with $5000 limits on each, or 10 cards with a $1000 limit per card. You are better off with the two cards offering you more. That’s because your credit rating is influenced by the credit lines available to you. Two $5000 credit lines not only look better, but also demonstrate greater faith in you as a borrower than ten cards that individually offer very little. Remember too that your credit score is influenced by your history in making timely payments on your balances. It is easier to track and remain consistent with two cards than it is with ten.
But that’s not all. When it comes to lots of cards, your creditors can factor in other criteria too. If you are in the market for a home or a car, then your lenders will want to determine the level of risk you represent as a borrower. There are two key elements here: outstanding credit and available credit. Many people confuse the two, so it is important to understand the difference: Outstanding credit is the total balance of monies owed on fixed term loans such as mortgages and cars as well as revolving credit accounts. Available credit is the actual dollar amount of credit to which you have access. For example, if you have a credit card with a $10,000 limit, and your outstanding balance is $2500, then your available credit would be $7500. |
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People’s monetary needs change over time and lenders are acutely aware of this. Emergencies, layoffs, illness and poor budgeting could create a financial bind. Even though you don’t need to tap into that $7500 credit line today, you just might find yourself using it all very quickly at a later date. Since lenders have no guarantee that the available monies won’t be used; their position is to view the dollar amount you can tap into as a risk.
Unused, open accounts may not affect your actual credit score very much. Still, you may find that you are turned down for a loan that you can easily afford because your unused credit is limiting your borrowing ability. To complicate matters even more, you should be aware that lenders use statistical models (automated underwriting systems) to assess risk and determine the probability of a borrower defaulting on a loan. Therefore, the lender will consider not only the number of current cards; outstanding credit; and available credit, but also what they view as your tendency to take on additional debt. If the lender’s system indicates that you will very likely apply for a lot of new cards at some point in the future, then the amount of money you qualify for today will be reduced. |
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Lots of credit cards never did anyone any good. Limit yourself to two cards with decent limits and low APR’s. Use them sparingly and pay off everything right away so that the debt does not accumulate. Get into the habit of using cash or your debit card. Finally, learn how to budget and use your money wisely so that you have enough for the curveballs that might come your way.
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