How many credit card applications
have you received this week? If you’ve applied
for a credit card recently, have just started college,
are about to graduate from college, or any one of
dozens of other ‘life changing’ events,
chances are that your mailbox is stuffed with offers
for low-interest credit cards, no-fee credit cards,
credit cards that give you cash rewards
or reward points, or just get you a pretty,
clear blue card.
How many credit cards should you have?
A better question is ‘how much credit
should you have available to you?’ When
lenders review your credit score, they look at a
number of factors, including your total debt and
the total amount of credit available to you. They
also look at whether your credit cards are maxed
out, how often you pay your bills, and what percentage
of your monthly income is tied up in meeting the
minimum amounts on your credit card bills and other
accounts.
None of which comes close to answering the question.
For that, let’s take a look at how various
figures affect your credit rating.
Available Credit – Your
available credit is the total of all credit that
is available to you. If you have a MasterCard with
a $5000 credit limit, a Visa with an $8000 credit
limit, 3 store credit cards with $1000 each and
a gasoline credit card with a $500 credit limit,
you have total available credit of $16,500. If that’s
less than 50% of your annual income, you’re
in pretty good shape – as long as you keep
your credit card usage below 50% of your available
credit.
Total Debt – Your total
debt is the total amount that you owe on all your
credit cards, auto loans, mortgage, personal loans
and other loans. Excluding your mortgage, your total
credit card debt shouldn’t be more than half
your annual income.
Debt/Income Ratio – A more
accurate measure that most lenders use is your debt/income
ratio. It measures how much of your monthly income
is tied up meeting your financial obligations. Most
lenders look for about a 38% debt/income ratio –
which includes your housing costs. If your rent
plus the minimum payments on your credit cards and
other loans is greater than 38% of your monthly
income, another credit card is not a good idea.
Credit Utilization – Credit
utilization is the percentage of your available
credit that you’ve actually used. If you have
$16,500 in available credit, and you owe $8,250
on the various credit cards, then your credit card
utilization is 50%. Most lenders look for credit
card utilization below 50%.
Recent New Accounts/Application
– If you do decide that you should have another
credit card, don’t just apply indiscriminately
for every credit card you’re offered. A flurry
of new credit card applications often signal to
lenders that you’re in financial trouble.
It’s far better to pick the best credit card
offered that you’re likely to qualify for
and apply for it.
Credit Card Diversity –
Another thing that lenders look at is the variety
of credit cards you carry. A history that shows
you using a variety of credit cards for different
uses shows that you have handled and can handle
credit tools appropriately. In general, if you have
1-3 general use credit cards, a department
store credit card, a gasoline
credit card and one for home improvements or
other specialized use, it will be looked on favorably.
