 Too-large
credit line hurts credit score
|
 Dear
Dr. Don,
Is it possible to have too high a credit limit? Right now,
I have two credit cards, one with a credit limit of $25,000 and
one with a limit of $15,000. My annual salary is only $35,000, so
I could never responsibly charge anything close to the limit on
these credit cards. Self control
with credit isn't a problem for me. I never carry a balance and
generally only charge a few hundred dollars a month on my cards.
I've heard that having a high credit-to-debt ratio is good for my
credit rating, but can too much credit hurt my score?
-- Mary Manage
 Dear
Mary,
A credit score is based on the information
in your credit report. That information is categorized in five basic areas, shown
below with the weight each factor has in the credit scoring model.
Payment history -- 35 percent
Amounts owed -- 30 percent
Length of credit history -- 15 percent
Types of credit used
-- 10 percent
New credit -- 10 percent
A high ratio of debt-outstanding-to-credit-available,
what you call a high credit-to-debt ratio, negatively impacts your
credit score, but there's a downside to increasing credit lines
on existing cards or applying for new cards in an attempt to reduce
that ratio. With $40,000 in available credit and you paying off
your low balances every month, there's nothing to worry about here.
Lenders also consider your ability to carry the debt
load. That deals with the income side of the equation, and that
isn't specifically considered in your credit score. It's called
capacity, and it considers whether you have the income to service
your credit lines.
If you want to manage your credit capacity,
you can tell the credit card companies to reduce the credit lines available on
these accounts. That frees up capacity. The effect on your credit score will depend
on how you use your cards. Since you generally only charge a few hundred dollars
per month on your cards, the effect should be negligible if you went from $40,000
to $30,000 in combined credit lines on these cards.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
|
