High credit limits or large amounts of unused credit will lower your score
As long as you don’t use that credit and add to your debt, having high credit limits on your cards is actually a good thing. Your debt-to-credit ratio, which makes up 30 percent of your FICO score, is the amount of revolving debt (i.e. the credit card balances) in relation to the amount of available credit (i.e. the credit limits). This calculation is used by Credit Bureaus to determine your ability to manage the credit you have. Ideally, you’d want this ratio to be under 30 percent.
For example, let’s assume that you have 3 open credit cards with limits of $5000, $7000 and $6000, equaling a total credit limit of $18000. Your balance on one card is $1700, on the second card it’s $1200, and on the third it is $2100; equaling a total balance of $5000. So basically you have used $5000 out of the $18000 available to you, resulting in a debt-to-credit ratio of 28 percent. This is to say, that only 28 percent of your available credit is being utilized at this time. The higher the percentage, the more likely you could be considered overextended which hurts your score.
How it can cause more damage:
If you are keeping your credit limits low on purpose, what you need to realize is that you are hurting your debt-to-credit ratio by making your collective balance appear to be a large chunk of your total available credit. Increment in the credit limit – or decline in balance – results in a more positive score for you.
So using the example given above, if one of your cards raised your limit by $1000, with your balances remaining the same, your debt to credit ratio will come down from 28 percent to 25 percent. On the other hand, if you were to cancel your card with the $7000 limit, without paying down on the other balances of $5000 to counteract the loss of credit limit, your new ratio will be 46 percent. Think about THAT!
Never using or not having any credit cards will improve your FICO score
It’s true that not having any credit cards might help control your spending, especially if the lure of too much available credit is too tempting to resist, but it will not help your score. What you need to keep in mind is that the FICO score of someone who has managed his credit responsibly is more likely to be higher than someone who has little or no credit history.
Buying everything with cash will surely save you from paying interest, but it is not an ideal thing to do in terms of building a good credit history.
How it can cause more damage:
Having too little credit history can lower your score, and if you don’t have any accounts that are older than 6 months, you might never get a score at all. They feel that the history is just not enough or too little to generate a score on. If you have a long history that is not so perfect and have made up your mind to get rid of all those cards, you are loosing on a chance to redeem yourself. FICO scores take into account the good and the bad, and if you generate more good, your score will improve.
Avoiding paying interest does not mean that you can’t build up a solid credit history. Use your credit cards in small amounts, and pay off the balance every month in full, and on time. This way, you succeed in building a favorable credit history and continue to enjoy a no-interest life.
Contrary to the perception that Credit is only for credit cards, it plays a major part in our ability to borrow money. In fact, it is used in many other places that you probably don’t even think of. For example, some employers check the credit histories of potential candidates as a pre-requisite to hiring. Be it renting a home or shopping around for a better insurance rate, credit histories are checked to make sure that you aren’t too much of a risk to cater to.
Your credit score, commonly known as the FICO score, is a vital indication of your “credit health” and can make a huge difference in what you pay for borrowed money. Therefore, it’s in everyone best interest to keep their FICO score as fit as possible.
So have a look at these 5 popular credit score myths that could do more damage than good, if you followed them.